Singapore Depository Receipts (SDRs): Your Gateway to Global Investing Through SGX

As the investment landscape becomes increasingly global, more Singapore investors are looking beyond the local market for opportunities. From technology giants to leading consumer brands, many of the world's largest companies are listed on overseas exchanges.

While investing directly in overseas markets is one way to gain exposure, it often involves foreign currency conversion, different trading hours and unfamiliar market processes.

Singapore Depository Receipts (SDRs) offer an alternative. They allow investors to gain exposure to selected overseas-listed companies while trading conveniently on the Singapore Exchange (SGX).

For investors who prefer a familiar local trading environment, SDRs can offer a simpler and more convenient way to gain exposure to selected overseas companies.

What are Singapore Depository Receipts (SDRs)?

Imagine you want to buy an Apple product.

You could purchase it directly from an Apple Store in the United States, or you could buy the same product from an Apple Store in Singapore. Either way, you are buying an Apple product. The difference is where you buy it from and how convenient the buying experience is.

Buying from Singapore may feel more straightforward because you pay in Singapore Dollars, shop through a familiar local store and avoid the additional steps involved in making an overseas purchase.

SDRs work in a similar way. A Singapore Depository Receipt (SDR) is a security listed and traded on the SGX that represents a beneficial interest in shares of a company listed on an overseas stock exchange.

Think of an SDR as a "local wrapper" around a foreign-listed share. Instead of buying the overseas-listed share directly, investors purchase an SDR on SGX, while the actual underlying shares are held by a depository on their behalf. Currently SGX provides access to Hong Kong, Thailand and Indonesia SDRs. These are the list of SDRs available:

Source: SGX

How are SDRs quoted?

The SDR name shows key details about the product. For example, Alibaba HK SDR 5TO1 (SGX: HBBD) means the SDR gives investors exposure to Alibaba shares listed in Hong Kong. “Alibaba” is the underlying stock, “HK” refers to the Hong Kong listing, “SDR” is the security type, “5TO1” means 5 SDRs represent 1 Alibaba share, and “HBBD” is the SGX ticker code.

The SDR price is generally derived from the underlying share price, adjusted for the exchange rate and conversion ratio. For example, if Alibaba trades at HKD 95.95 and the HKD/SGD rate is 0.1651, one Alibaba share is worth about SGD 15.85. Since the ratio is 5TO1, the estimated SDR price is SGD 15.85 ÷ 5 = SGD 3.17. The actual traded price may still differ slightly due to demand and supply, liquidity, bid-ask spreads and market timing differences.

Why Consider Investing in SDRs?

1. Convenient Access to Overseas Companies

SDRs provide investors with an alternative way to gain exposure to selected overseas companies through SGX instead of trading directly on the overseas exchange.

For investors, this means:

• Trading through SGX;
• Trading during SGX market hours (9:00 a.m. to 5:00p.m.);
• Using Singapore Dollars for trading and settlement;
• Avoiding the need to place trades directly on the overseas exchange.

This can be especially useful for investors who want overseas exposure but prefer the familiarity of the Singapore market.

2. Trade and Settle in Singapore Dollars (SGD)

SDRs are quoted, traded and settled in Singapore Dollars. This means investors do not need to perform currency conversion every time they buy or sell an SDR, making the transaction more straightforward.

If the underlying securities distribute dividends, it will also be paid to investors in Singapore Dollars after deducting any taxes, expenses and corporate action fees.

However, investors should note that trading in SGD does not remove currency risk. The SDR still derives its value from overseas-listed shares, so exchange rate movements can still affect its value.

3. Diversify Beyond Singapore

Diversification is one of the fundamental principles of investing.

While Singapore offers many quality companies, certain industries have a stronger presence overseas.

By investing in SDRs, investors can gain exposure to selected overseas companies and industries that may not be as widely represented in the Singapore market.

For example, an investor whose portfolio mainly consists of Singapore banks and REITs may use SDRs to access overseas companies in other sectors or markets. This can help broaden the portfolio and reduce reliance on a single country or industry.

4.. Smaller Investment Amount

One key feature of SDRs is that they may offer investors a more affordable way to gain exposure to selected overseas-listed companies, as the minimum investment amount can be significantly lower than investing directly in the underlying shares on the overseas listed exchange.

Using CATL HK SDR 30to1 (SGX:HCCD) as an example, the minimum investment outlay for the SGX-listed SDR is approximately 30 times lower than purchasing CATL (HKEX:3750) directly on HKEX.

This lower investment nominal makes SDRs more accessible for investors who wish to diversify into overseas companies without committing a larger capital outlay upfront.

Understanding the Liquidity Trade-off

Like any investment, SDRs come with both advantages and considerations. One important consideration is liquidity. Liquidity refers to how easily an investment can be bought or sold without significantly affecting its market price.

Think of two supermarkets. One is a large supermarket with hundreds of shoppers every hour. The other is a neighbourhood minimart. Both sell the same bottle of mineral water. The larger supermarket usually offers more competitive pricing because there are more buyers and suppliers. The minimart is still convenient, but prices may differ slightly due to lower traffic. For small trades, this may not matter much. Larger orders should consider market depth, spreads and execution.

One simple way to assess liquidity is by looking at the bid-ask spread, which is the difference between the buying price and selling price.