Harsh Truths About Investing in STI ETF

Many of my friends have asked me about my thoughts on Straits Time Index (STI) exchange traded fund  (ETF) and why I do not invest in the STI ETF. The STI ETF is essentially a fund that comprises the top 30 companies in Singapore and it is thought of as being safe and stable due to its diversification. In my opinion, investing in STI is not an ideal passive income strategy and your money can be put to much better use. There are mainly 2 ways you can earn from a stock: share price appreciation and dividends. In this article, I would be elaborating on why I think investing in STI is not a good passive investment strategy.

1. Inferior Share Price Appreciation

Investors who invest in Exchange Traded Funds (ETFs) such as the STI ETF usually adopt a buy and hold long term strategy. The idea is that the ETF will have an upward trend in the long run and they will profit from the appreciation of the ETF price. Is that the case with the STI ETF? If we look at a 15 year period from 2005-2019, the STI ETF price rose from $2250 to $3350. That is a 48.8% appreciation over a 15 year period which is about 3% per year. That doesn't sound too bad. However, it pales in comparison to the S&P 500 over the same time period. The S&P 500 appreciated by 150% from $1216 to $2990 over the same 15 year period. That is 3 times the appreciation of the STI ETF! It looks even worse if you compare it to ETFs such as the NASDAQ composite. In my opinion, it doesn't make sense to buy the STI ETF and wait for its share price to appreciate given how limited it can grow due to the small Singapore market size. Furthermore, if you want to adopt a buy and hold long term strategy for ETFs, it makes more sense to buy ETFs that have much larger room to grow such as the S&P 500 or NASDAQ composite than to buy the STI ETF. After all, how big can the Singapore market be locally?

Historical data for STI ETF derived from here.

2. Mediocre Dividends

STI ETF also benefits investors by paying out dividends regularly. The average dividend yield for STI ETF for the past 10 years is 3.5%. This is not impressive when compared to other dividend paying stocks such as REITs and Banks which have a higher average dividend yield of 5-7%. Moreover, other ETFs such as the S&P 500 and NASDAQ composite also pay out similar dividend yields as the STI ETF but have a much higher share appreciation over the same time period. Therefore, it makes no sense to buy the STI ETF for dividends as its dividend payouts is merely mediocre when compared to other blue-chip dividend paying stocks in Singapore. 

Historical data for STI ETF dividends derived from here.

3.Diversification?

One of the main attractions regarding ETFs is diversification which makes it a relatively safe investment. The STI ETF consists of the top 30 companies in Singapore and that makes it sounds like it is a very diversified investment. Is the STI ETF truly diversified? The short answer is no. In contrast, other ETFs such as the S&P 500 consists of 500 companies including Microsoft, Apple, Facebook, Google which are leading brands across the world. It is much more diversified than the STI ETF. Furthermore, most of the STI ETF companies are from only 2 sectors of the economy: property and finance. This makes it relatively weak in diversification when compared to other ETFs in other countries. Therefore, the diversification factor of STI ETF is not a very attractive reason to invest in it. 

TLDR: The STI ETF is a great place to start for beginner investors who are new to the market. However, you should progress to investing in other stocks or ETFs once when you have a better understanding of the market to get more bang for your buck. 

What are your thoughts on the STI ETF?