Q&A Series: Partake in Singapore’s equity market through this ETF with a low expense ratio of 0.25%

With Singapore being a key beneficiary in the upswing of the global semiconductor cycle fuelled by AI-related demand, we think it is a key market investors should pay attention to. In our latest refresh of the ETF Focus List, we recommended the Nikko AM Singapore STI ETF (SGX:G3B) for its low expense ratio of 0.25% and lower three-year tracking difference relative to other similar ETFs in the market.

In this article, we discuss the outlook and prospects for Singapore as well as the exposure investors can get from the Nikko AM Singapore STI ETF.

Introducing the Nikko AM Singapore STI ETF

The Nikko AM Singapore STI ETF* aims to track as closely as possible to the performance of the Straits Times Index (STI). The computation of the STI is by FTSE International Limited and represents the top 30 companies listed on the SGX-ST Mainboard ranked by market capitalisation.

*for more, please visit Nikko AM's website.

Table 1: Key information about the ETF

ETF Details
Underlying Index	Straits Times Index (STI)
Base Currency	SGD
Trading Currency	SGD
SGX Code	G3B
Listing Date	24 February 2009
Number of Holdings	30
Assets Under Management	SGD 736.45 million
Trading Board Lot Size	1 unit
Expense Ratio	0.25%
Dividend Distribution Frequency	Semi-annually
Source:  Nikko Asset Management. Data as of 12 June 2024. For more, please visit Nikko AM's website.

As of 30 April 2024, the ETF has the largest sectoral exposure to the financials sector, 52.7%, which comes as no surprise as the STI is largely made up of the banks. Beyond the financials sector, the ETF also has sectoral exposures in real estate (17.2%) and industrials (15.5%). We checked in with Nikko Asset Management to find out more about their investing and thought process.

1.     What is the economic outlook for Singapore in 2024? 

We are broadly constructive on the economic prospects in Singapore and see the potential of economic growth in Singapore accelerating modestly to about 2% in 2024, led mainly by exports. Recent 1Q24 GDP growth came in at 2.7%, matching the flash estimate, as a weaker manufacturing sector was offset by a stronger-than-expected services sector¹. The contraction in industrial production narrowed in April to 1.6%, from the 9.2% decline in March¹. Excluding the volatile biomedical cluster, industrial production would have grown 1.7% in April, from a 5.7% decline in March [1]. We continue to expect a gradual recovery in the manufacturing sector, as the AI boom broadens out to encompass a wider range of semiconductors and also to devices like handsets and PCs.

[1] Source: Bloomberg, Nikko AM. June 2024.

2.     What are some of the sectors driving Singapore’s growth potential?

The pillars of growth behind the Singapore‘s economy primarily comes from manufacturing and services. The manufacturing sector is driven mainly by electronics and biomedical manufacturing clusters, while the services sector in Singapore is broadly diversified across financials, transportation, wholesale trade, tourism-related and communications services.

In 1Q24, the electronics recovery has been weighed down by slower demand for automotive and industrial chips. Unlike regional peers Taiwan and South Korea, Singapore’s electronic sector is less leveraged to the current strong demand for AI related advanced chips. We do expect a better improvement for the electronics recovery in the latter half of 2024, as the recovery broadens. Within services, financial and tourism-related services have been the bright spots in 1Q2024. Financial services grew strongly in 1Q2024 due to higher fees and commission incomes in the banking and fund management industry, while tourism-related services such as accommodation (hotels), retail and food and beverage benefitted from the slew of mega star concerts and recovery in Chinese tourists.

3.     The STI is largely made up of the financial sector. With markets anticipating about two Fed rate cuts this year, how would this affect the financial sector?

Financials constitutes about 50% of weight in the STI. With the market anticipating about two Fed rate cuts in 2024, the likely impact on bank earnings will come from the lower prospect of net interest margin (NIM [2]) expansion, which has been a positive driver of earnings growth over the past 2 years. As such, we believe earnings growth in the financial sector will moderate to lower single digit growth in 2024, compared to the strong double-digit earnings growth in 2023. Despite this, we still expect bank earnings are likely to stay elevated in a higher-for-longer interest rate scenario, with credit costs likely to remain contained.

[2] Net interest margin (NIM) is the net interest income a bank earns from credit products like loans and mortgages, minus the interest it pays to holders of savings accounts and certificates of deposit (CDs). Expressed as a percentage, the NIM shows how likely a bank or investment firm is to thrive over the long haul.

4.     On the note of rate cuts, how does the change in interest rate expectations affect the outlook of the real estate sector which is interest rate sensitive?

The real estate sector in the STI is represented primarily by Real Estate Developers and Real Estate Investment Trusts (REITs). The real estate sector has one of the highest sensitivities to interest rates. As interest rates fall, mortgage rate decreases, making it cheaper for people to buy or refinance properties. Lower interest rates also improve affordability which in turn leads to higher property prices. REITs are also high dividend yielding investment, which tend to correlate with the movement in interest rates and bond yields. As interest rates or bond yields fall, high dividend yielding investments such as REIT would look more attractive.  

In recent months, heightened expectations of a delay in interest rate cuts by the Fed to the year-end has supported stocks of the Singapore banks but has depressed the real estate sector especially REITs. With markets anticipating about two Fed cuts later in 2024, we expect this should support and improve sentiment for the broad real estate sector.

5.     Apart from the financial and real estate sectors, industrial companies are also a major part of the STI. What are some catalysts driving the industrial sector?

Outside the financial and real estate sector, industrial companies form about 15% of the STI. This sector is a broad group of companies comprising land and air transportation, engineering, shipbuilding and diversified conglomerates. Most of these companies derive their growth internationally (outside Singapore). The key drivers or catalysts driving the group would typically be the outlook for global trade and international manufacturing data.

6.     What makes this ETF shine?

The Nikko AM Singapore STI ETF gives you easy and efficient access and exposure to the Singapore Equity market in a low cost manner, with a very competitive total expense ratio (TER) capped at 25bps per annum.

7.     Any closing comments?

If you are interested in investing in the Nikko AM Singapore STI ETF but are unsure of where to start, you can consider setting up a regular savings plan via FSMOne’s ETF RSP feature.

You can now enjoy 0% processing fees* for ETFs on our RSP list on FSMOne from now until December 2024. You can also select your desired frequency of how often you wish to buy into the ETF every month, up to a maximum of 4 times per month and with a minimum starting amount of just S$50.

Important Information by Nikko Asset Management Asia Limited:

This document is purely for informational purposes only with no consideration given to the specific investment objective, financial situation and particular needs of any specific person. It should not be relied upon as financial advice. Any securities mentioned herein are for illustration purposes only and should not be construed as a recommendation for investment. You should seek advice from a financial adviser before making any investment. In the event that you choose not to do so, you should consider whether the investment selected is suitable for you. Investments in funds are not deposits in, obligations of, or guaranteed or insured by Nikko Asset Management Asia Limited (“Nikko AM Asia”).

Past performance or any prediction, projection or forecast is not indicative of future performance. The Fund or any underlying fund may use or invest in financial derivative instruments. The value of units and income from them may fall or rise. Investments in the Fund are subject to investment risks, including the possible loss of principal amount invested. You should read the relevant prospectus (including the risk warnings) and product highlights sheet of the Fund, which are available and may be obtained from appointed distributors of Nikko AM Asia or our website (www.nikkoam.com.sg) before deciding whether to invest in the Fund.

The information contained herein may not be copied, reproduced or redistributed without the express consent of Nikko AM Asia. While reasonable care has been taken to ensure the accuracy of the information as at the date of publication, Nikko AM Asia does not give any warranty or representation, either express or implied, and expressly disclaims liability for any errors or omissions. Information may be subject to change without notice. Nikko AM Asia accepts no liability for any loss, indirect or consequential damages, arising from any use of or reliance on this document. This advertisement has not been reviewed by the Monetary Authority of Singapore.

The performance of the ETF’s price on the Singapore Exchange Securities Trading Limited (“SGX-ST”) may be different from the net asset value per unit of the ETF. The ETF may also be suspended or delisted from the SGX-ST.   Listing of the units does not guarantee a liquid market for the units. Investors should note that the ETF differs from a typical unit trust and units may only be created or redeemed directly by a participating dealer in large creation or redemption units.

The Central Provident Fund (“CPF”) Ordinary Account (“OA”) interest rate is the legislated minimum 2.5% per annum, or the 3-month average of major local banks' interest rates, whichever is higher, reviewed quarterly. The interest rate for Special Account (“SA”) is currently 4% per annum or the 12-month average yield of 10-year Singapore Government Securities plus 1%, whichever is higher, reviewed quarterly. Only monies in excess of $20,000 in OA and $40,000 in SA can be invested under the CPF Investment Scheme (“CPFIS”). Please refer to the website of the CPF Board for further information. Investors should note that the applicable interest rates for the CPF accounts and the terms of CPFIS may be varied by the CPF Board from time to time.

Nikko Asset Management Asia Limited. Registration Number 198202562H.