Morningstar Dividend Yield Focus Tilt 30 Index has been renamed to Morningstar Singapore Yield Focus Index at the last minute. Our upcoming publication #597 will not reflect the updated name.
Retail investors often lament that setting up a diversified portfolio with a limited capital base often compromises returns. Indeed, the capital requirement for a diversified portfolio to generate meaningful returns can be substantial and particularly challenging for young investors and retirees who have minimal savings to invest.
Yet, for this group of investors, investing in Exchange Traded Funds (ETF) seems like the most logical first step to circumvent this problem.
The first ETF was created and introduced in Canada in 1990 offering the advantages of pooled investing and trading flexibility. However, it was not until the late 2000s that ETF was finally gaining popularity.
In the coming week, Phillip Capital is launching its latest ETF product – Phillip SING Income ETF. As its name suggests, the upcoming ETF is a yield-focused, Singapore-centric security. Shares Investment took the opportunity to meet with the Fund Manager Mr. Tan Teck Leng, and Institutional Portfolio Director Mr. Martin Chong to understand more about the product. Here are 4 reasons why investors should consider investing in Phillip SING Income ETF.
In the mid-term horizon, the investment landscape is marred by the Federal Reserve’s interest rate hikes and the ongoing trade war. Both developments have profound impacts on the world economy and concentrating all capital in a single asset could result in substantial losses should the investment go south. To a novice and unseasoned investor, this could be a deadly mistake.
First and foremost, Phillip SING Income ETF is designed, with the intent to minimise market volatility and provide stability to investors. In collaboration with Morningstar Singapore, Phillip Capital replicated (as much as possible) Morningstar Singapore Yield Focus Index (MSYF) to build Phillip SING Income ETF.
Each selection is capped at 10 percent to ensure that the concentration of a single security is not excessive and hence lowers the market beta. Effectively, investing in this ETF immediately gives investor a ready-made diversified portfolio.
Quality Over Short-term Gains
Many investors make the mistake of prioritising short-term gains over quality. This has led to a rise in the cult of active investment which tends to underperform the market in the long run. On the contrary, studies have shown that the most successful investors like Warren Buffett are those that focus on the quality of their holdings.
Underpinning Morningstar’s DYF family of indices, selections are scored based on both qualitative and quantitative aspects such as level of economic moat, strength of the financial health and dividend yield.
These factors are non-exclusive and should be considered hand-in-hand: The level of economic moat determines the level of earnings stability while the strength of the financial health measures the risk of bankruptcy. Ultimately, a sustainable dividend yield depends on both of the above. By incorporating these considerations into the construction of the ETF, Phillip Capital aims to enhance the portfolio’s exposure (strategic beta) to high-yielding superior quality companies.
Under this methodology, up to 70 percent of Phillip SING Income ETF constitutes of GIC or Temasek-linked companies. According to its prospectus, the top 10 constituents comprise mostly the blue chip companies in our local stock market. Based on MSYF Index, we also see some consumer staple stocks such as Dairy Farm International and Sheng Siong Group being included. Owing to strong earnings stability of these companies, prospective investors can also expect a steady dividend flow. Dividend distribution for Phillip SING Income ETF occurs semi-annually with indicative yield forecast roughly at five percent.
On top of a steady income stream, investors should also bear in mind that quality companies have more resources which allow them to invest in long-term growth. Inherently, this means that there is also growth potential built in into Phillip SING Income ETF. From the chart below, investors can see how the enhanced-STI portfolio delivered superior historical returns to the market.
Low Monitoring Effort, High Liquidity
Unlike full-time market watchers and analysts, most retail investors hold a full-time time job outside of their investments. Often than not, most do not spend sufficient time, energy or knowledge to research about every single investment they make. As a result, active investing also gives rise to mistakes that arise from asymmetric information or lag reaction in face of changing fundamentals.
As ETFs like Phillip SING Income ETF are literally diversified tradable securities, tracking the performance of a single ETF is significantly less taxing and more efficient. Meanwhile, the ETF manager also does not actively manage the fund but only performs rebalancing semi-annually to ensure the ETF is tracking the index it is invested in.
As mentioned, as a tradable security, Phillip SING Income ETF will also be traded on the Singapore Exchange and units will begin after the initial offer period. Just like common stocks in the exchange, investors of Phillip SING Income ETF can lock in profits whenever they wish or choose to reinvest their dividends for more units in the open market.
Low Costs, Higher Efficiency
Due to the passive style of investing, ETFs are known to be low-cost index funds. For Phillip SING Income ETF, the manager charges a 0.4 percent management fee per annum for all the benefits mentioned above. For a $100,000 invested capital, the annual charge amount to only $400 – less than a quarter of what IPhone XS Max would cost. Assuming no capital gains and that the ETF meets the forecast of five percent yield, annual return would already be $4,600.
That said, there are risks to all sorts of investments. For Phillip SING Income ETF, which replicates MSYF, the standard deviation is 14.7 percent lower than the STI’s 17.7 percent, over the period from June 2005 to August 2018. What this means is that the ETF portfolio risk is historically lower than market risk.