SG50 SPECIAL : SINGAPORE TAKES ON ETFS, FOR BETTER OR WORSE ?

Sometime in March, the MAS announced three broad initiatives for individual investors.

retail bonds initiative

The new rule is that SGX ETFs that make limited use of derivatives can be traded by the public.

Where were ETFs before this ?

Out of reach since 2012, except for 8 then, because retail investors had to take an SGX financial literacy test (https://onlineeducation.sgx.com/specifiedinvestmentproducts/) before being allowed to trade most of the 96 listed ETFs in the Singapore Stock Exchange, that is unless they are accredited or expert investors, or if they possess the right education or work or investment experience.

Under the new scheme, ETFs that pass the mark will be reclassified as EIPs (Excluded Investment Products) which means the public will grow to love ETFs as the world has come to. And as we continue to get positive press reports like this one below, the number of ETFs permitted for public trading has risen to about 19 as the SGX comes out to waive ETF clearing fees for both institutional and retail investors between June 1 and Dec 31, 2015 and fees on block trades till end 2017.

singapore etf article

A Bit About ETFs, ETNs and Index Funds

There are mutual funds and indexed mutual funds which have to be bought over the counter from the fund company. Over the years, indexed funds have been found to outperform the actively managed mutual fund. Yet this has also proven to be a hassle because price discovery is difficult and for most of the time, one will not know the transacted price until after the deal is done.

In comes the convenience of the ETF, an offspring of the indexed fund, which is traded over the stock exchange and that is the fastest growing segment of the stock markets today with US$368 bio of new funds flowing into ETFs versus global new IPOs of US$286 bio in the past 12 months.

ETFs have over taken hedge funds in terms of total assets and ETF trading volumes in the US alone for the past year have over shadowed the size of the US economy.

etf vol larger than us gdphttp://www.bloomberg.com/news/articles/2015-07-30/the-amount-of-etf-shares-being-traded-has-eclipsed-u-s-gdp

What about the ETNs ?

That is another similarly indexed linked product that is in the form of a note i.e. a security issued by a bank and also listed on the stock exchange for trading.

The main difference is for the ETF, you are investing into a fund but for the ETN, you are placing your money with a bank and thus taking the bank’s risk.

Yet there are upsides to it, because the ETN is supposed to less tracking errors, which we will come to find may not be theoretically true, and there are tax advantages to them for investors in certain jurisdictions.

There are currently nearly 5,000 ETNs in the world now and about 50% more for ETFs and we note that statistics do not group them together which means this entire idea of Exchange Traded Products has reach a new high globally with many good years left in store.

Why ETF or Why Not ?

From the Bloomberg article from above, we note that one-third of the trading volume comes from the SPY US ETF (S&P 500), with US$ 6 trillion in turnover per annum even when their total AUM is only US$ 177 bio and the top 4 ETFs combined account for 45% of total turnover.

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