As the market sentiment continued to get more and more negative in early 2016, I decided that it was time to “get acquainted” with the usage of CPF Ordinary Account money to purchase STI ETF, if the opportunity arises.
This post will include some basic information on the process of using your CPF Ordinary Account to purchase SPDR STI ETF (ES3).
CPF Investment Scheme
CPF savings can be used in an investment scheme known as the CPF Investment Scheme (CPFIS). The CPF Investment Scheme gives you an option to invest your Ordinary Account (OA) and Special Account (SA) savings in a wide range of investments to enhance your retirement nest egg.
In this instance, I will be discussing on the use of Ordinary Account money.
Do note that it has been widely reported that most investors who use CPF savings to invest would have been better off leaving their money in their Ordinary Accounts. CPF Ordinary Account earns 2.5% interest. An extra 1% interest is paid on the first $60,000 of a member’s combined balances (with up to $20,000 from the OA). You would be touching CPF savings at your own risk!
CPF Investment Account for OA
First, you will need to open a CPF Investment Account with one of the three CPFIS agent banks – POSB/DBS, OCBC or UOB. They can have different fees and charges so you’ll have to do some homework on this front.
This is simply an account that is “attached” to your CPF Ordinary Account since you are not able to directly access the money in your CPF Ordinary Account. In layman terms, think of it as the glue that holds together your CPF-OA, Central Depository Pte Ltd (CDP) account, and Brokerage account. It allows your brokerage to access the money in your CPF-OA to buy the ETF and deposit them in the CDP.
Do note that it is possible that your CPF Investment Account and Brokerage Account need not be from the same bank. You can just link them up once you have both of them opened. I opened my CPF Investment Account with DBS simply because I already had a DBS Vickers brokerage account and wanted to minimize the hassle.
Brokerage Account & Linkage
As mentioned before, I’ve already opened my brokerage account with DBS from long ago. I made a call to DBS Vickers to re-activate my dormant account and asked them to link it up with my CPF Investment Account.
Once the link-up is done, your trade will be able to select the correct settlement mode – CPF. This is such that a trade will know to deduct the funds from the correct source.
For the link-up, you’ll need to provide the CPF Investment Account number as they can’t just pull it from their system. The brokerage exists as a separate entity, thus they will not be able to answer all questions regarding CPF Investment Account. Instead, you will need to call the agent bank (in my case, DBS) for any queries. Likewise, DBS Bank can’t answer any of your brokerage questions, either.
Costs of Making a Trade (ETF)
On the 18th January 2016, I made a “buy” trade for SPDR STI ETF (ES3) at $2.75 for 1,000 shares.
In my CDP statement, it listed the charges as a total of $2777.92
However, in my CPF statement, it listed the charges as a total of $2781.13
What is the real cost? Let’s break it down:
Cost of 1,000 shares = $2750.00
Brokerage fee = $25.00 (DBS Vickers minimum)
Clearing fee = $0.89 (0.0325% of the contract value)
SGX trading fee = $0.21 (0.0075% of trade contract value)
GST = $1.82 (0.7% of fees)
Agent Bank Charges
Transaction Fee = $2.50 (per 1,000 shares subject to a max. $25)
CDP Settlement Fee = $0.50 (collected by agent bank on behalf of CDP)
GST = $0.21 (0.7% of fees)
Total Cost = $2777.92 + $3.21 = $2,781.13
Costs of Quarterly Service Charges (ETF)
I deliberately held the SPDR STI ETF for more than a quarter to trigger the quarterly service charges. The applicable charges are as follows –
$2 per share/loan stock/unit trust counter per quarter, subject to a minimum charge of $5.
What is the real cost?
Agent Bank Charges
Cost of holding one counter = $5.00
GST = $0.35
Total Cost per Quarter = $5.35
Total Cost Of Holding 1 Counter for 4 Quarters = $21.40
* UOB and OCBC charges $2 per counter without a minimum
Comparison & Ending Thoughts
Let’s make a quick comparison.
Assuming that I had kept the $2750 in my CPF Ordinary Account, it would make $68.75 in interest at 2.5% with zero risk.
Assuming that I made a trade to buy STI ETF, I would incur a one-time (buy) fee of $27.92, followed by annual fees of $21.40. When selling, don’t forget that another one-time fee will be incurred. On the other hand, there are dividends to be collected. The first of the semi-annual dividends collected in February was $51.00 (at $0.051 per share). That is because the recurring fees are calculated on a per counter basis (it doesn’t matter whether you have 1,000 or 10,000 units or STI ETF, you’re still paying $5.35 per quarter). Therefore the more units of a single ETF you have, the less fees you are paying per unit. Capital gains/losses – we all know how it works.
Touching my CPF money will only be done after some serious thinking, coupled with a huge margin of safety. When I made that trade at $2.75, the idea was to figure out what exactly I’m getting myself into. You know, should the STI continue to tank. The plan was to conservatively use a small portion of my CPF money when STI ETF first hits $2.25.
Well, that never happened, but this episode helped me in understanding exactly how the fees worked. You’d be surprised to find the number of variants people talked and shared online. My fees are re-produced directly from my statements. If you found this useful, that’s great to know.
I find it so important that I have to stress once again, I am not advocating the use of CPF money (2.5% interest risk-free) to invest in STI ETF. Index investing is certainly not the holy grail to all investment woes. Do so only if you know exactly what you’re doing!