Tuesday, August 26, 2014

STI ETF Showdown: The SPDR is going to kill off Nikko AM

The SGX has 2 ETFs that track the Straits Times Index (STI).

There is the long time player, SPDR STI ETF, which has been trading for years with a standard board lot of 1000 shares.

Nikko AM STI ETF is the newer player that has been trading with a reduced board lot of 100 shares.

Along with the new change in the SGX that board lots for ordinary shares are going to be reduced to 100 shares, the SPDR STI ETF and the Nikko AM ABF Bond ETF are the only 2 ETFs to also drop to 100 shares a lot. This will bring SPDR in direct competition with Nikko AM.

Let's be very honest here. The only reason why investors have been flocking to Nikko AM is due to the simple fact that the capital requirements to invest with them is a lot lower. Setting aside $300 odd every now and then to invest in the stock market is a lot easier than the $3000 plus that the SPDR requires. Not anymore come 19 January, it will now be a fair playing field.

So, let's just take a look at these 2 products and do a quick comparison to find out which is better, shall we? 

Looking at the important tangibles, it has a lower total expense ratio by almost 25% and it also has 4 times more Assets Under Management (AUM). This would affect liquidity and transaction costs, which I will explain later.

Both ETFs distribute twice a year, every 6 months. They just have different distribution schedules. The SPDR has been around much much longer than Nikko AM. However, both of these attributes don't really make a difference if you were deciding between the two.

Hands down, the clear winner is the SPDR STI ETF.

If it was a perfect world, we would assume that 4 times larger AUM would directly equate to 4 times more liquidity. Personally, I think that the liquidity of the SPDR will be immensely more than Nikko AM. This boils down mostly to what I currently perceive as the type of investors that utilize both instruments.

The SPDR has been around longer, so it is much more well-known. SPDR is also a famous brand for ETFs, giving it a good presence in investors' mindset. To me, the SPDR investor is the more savvy, more experienced investor with much deeper pockets.

The Nikko AM is actually defeated by it's own main benefit, small capital outlay. Investors that invest with Nikko AM do not have deep pockets and are most likely not as experienced since the ETF is much newer. The recent popularity of the ETF is also from the POSB Invest Saver plan that DBS/POSB rolled out. This targets longer-term investors and does not contribute to the liquidity on the markets.

Going over to SGX and just looking at the 2 ETFs, you can see a stark difference in daily volume and the value of it. The SPDR is able to absorb much much more money, while Nikko AM could be easily overrun by a few players.

Liquidity is important because it reduces the bid-ask spread and keeps transaction costs low. It also ensures that there is proper price discovery happening. If the ETF is moving up too fast, arbitragers will be able to sell it by comparing the value of the underlying securities. If liquidity is thin, price discovery is not as efficient and the ETF may be selling at discounts/premiums for a while. While discounts might be good for buyers, eventually it will come back and haunt you once you become a seller. Fair value for an ETF is definitely much better. Lastly of course, is the depth of the bid and ask. The SPDR will have a much larger and deeper book, meaning that it will not be easy to manipulate and move the market. This also means that the SPDR will be suitable for large investors willing to make a large lump-sum order. It goes without saying that small investors can also do the same.

At the end of the day, it will really be because of the lower total expense ratio and the higher liquidity that will cause the SPDR to reign. I think that the Nikko AM ETF will have a lot of liquidity drained out of it as investors move out of it and into the SPDR.

Hopefully Nikko AM has enough people subscribing to RSP plans so that it can continue running and be a useful tool to those retail investors who don't bother about the daily ups and downs of the stock market. Perhaps they might even slash their expense ratio to compete?

But until that happens, the SPDR will be the choice ETF for the STI.


  1. I think, the key selling point for Nikko is that the minimum lot for Nikko is lower.

    So, if you are a Stanchart trading account holder, you need just 339 SGD for 100 units, while you will still need 3390 for 1000 units of SPDR.

    Of course, with the reduction in board lots, this point becomes invalid.

    1. Sorry for the late response Vatsa, but yes, today the Nikko AM will get its butt handed to itself!

  2. Unless everyone is using SCB, I don't see how anyone would want to buy 100 shares at $300+ when commissions are $25. For this price range, only those lowly retail investors (like myself) are able to afford, and they would be looking at a RSP like POSB Invest Saver, where they would be paying only $3 comm for $300 a month. On the whole I think this 100 lot thing is too hyped up, how many brains did the SGX use to do the simple math of reducing lot size by a factor of 10? With commissions still so high, it's half the job done. Just my 2 cents.


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