Index funds are one of those underrated investment assets that Singaporeans should learn to love. Investing in an index fund is simple and fuss free. All you have to do is to choose the market index that you would like to mimic. Then, make a commitment to invest in a few units per month for the next 20 years of your life. If you are able to make this commitment for the next 20 years, you are likely to outperform a whole lot of average investors. Even Warren Buffett, who is widely considered to be the greatest investor of all-time, thinks that this is the best approach towards wealth accumulation.
But there’s one problem: Paradox of choice. There are so many different types of index funds for you to choose from. As a result, it often leads to choice overload, where it becomes difficult for you to make a decision when faced with too many options. To help you overcome the paradox of choice, we want to introduce you to the best low-cost index funds that you can invest in.
1. For SG exposure: SPDR STI ETF
Most Singaporeans start their investing journey by investing in the local stock market. Thus, it’s only natural that we introduce the index funds that track the Straits Times Index (STI). Both SPDR STI ETF and Nikko AM STI ETF track the performance of the top 30 companies listed on SGX. They have an expense ratio of 0.3% and 0.35% respectively.
While conventional wisdom will guide us to choose the lower cost index fund, we also have to look at another factor: Annualised tracking error. The annualised tracking error gives an indication of how well the index fund tracks the index’s performance. A wider annualised tracking error means that the index fund doesn’t track as well as it is supposed to. On top of the lower expense ratio, SPDR STI ETF also has a lower tracking error (0.0512% vs Nikko AM STI ETF 0.22%)
Verdict: SPDR STI ETF
Read also: Beginner’s Guide To Investing Strategies
2. For US exposure: SPDR S&P 500 ETF
If you have a bigger risk appetite, you can consider investing in an index fund that tracks the US indices. S&P 500, Nasdaq and Dow Jones Industrial Average (DJIA) are the three indices that Wall Street investors reference as ‘the market’. SPDR S&P 500 ETF, SPDR DJIA ETF, Lyxor Nasdaq are some of the index funds that you can choose to invest in. These index funds give your portfolio an exposure to the US market. But among these index funds, the SPDR S&P 500 ETF has the lowest expense ratio (0.09%). The expense ratio is 33-67% lower than SPDR DJIA ETF and Lyxor Nasdaq ETF respectively.
Verdict: SPDR S&P 500 ETF
3. For REIT lovers: Phillip APAC SGX REIT ETF
Property will always be the first love of many Singaporean investors. Financial institutions also recognize the fact that Singaporeans love property. Thus, the concept of REIT index was born. Soon after, REIT index funds started popping up in the market to capture the REIT loving crowd in Singapore.
There are currently 3 REIT index funds listed on SGX: Lion Global S-REIT ETF, Phillip APAC SGX REIT ETF and Nikko AM Straits Trading Asia ex-Japan REIT ETF. Nikko AM Straits Trading Asia ex-Japan REIT ETF and Lion Global S-REIT ETF have an indicative management fee of 0.5% of net asset value per annum. From a cost perspective, Phillip APAC SGX REIT ETF’s 0.3% management fee offers the best value.
Apart from cost, the other difference between the three REIT index fund is the index that the index fund tracks.
|Index Fund||Benchmark Index|
|Nikko AM Straits Trading Asia ex-Japan REIT ETF||Asian REIT index|
|Phillip SGX APAC Dividend Leaders REIT ETF||SGX APAC Ex-Japan Dividend Leaders REIT Index|
|Lion Global S-REIT ETF||Singapore REIT Yield Focus Index|
Verdict: Phillip APAC SGX REIT ETF
Start investing in an index fund today
It ain’t so hard to make a choice, isn’t it? Now, it’s time to start investing in a low-cost index fund.
Still feel unprepared? Find out what are the right kind of investments for you here.