Monday, January 19, 2015

The Death of an ETF

Back in Aug 2014, I wrote a piece called, "STI ETF Showdown: The SPDR is going to kill off 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.
Hands down, the clear winner is the SPDR STI ETF."
And now let us see the volumes of both ETFs today when they are now playing on the same playing field:

DAMN, that's a huge difference.

The bid-ask spread for the Nikko AM is 3 cents, while for the SPDR it is just 1 cent!

The traded value of the SPDR ETF was a whooping $708,000, while the traded value of the Nikko AM ETF was only a mere $26,500. That is 26.5 times more!

Trouble in paradise, Nikko AM?

Recap from Aug 2014:

ETFs can die because of low liquidity and low AUM, making them inefficient investing tools and expensive ones as well.

Nikko AM might be able to stem this off with their RSP feeding funds into the ETF, but I would rationalize that only an ignorant retail investor buying the ETF off the exchange directly would pick Nikko AM over SPDR.

I don't know about you, but I like to pick winners and "Hands down, the clear winner is the SPDR STI ETF".

It is simple game theory. If 2 shops selling the exact same product opened up right beside each other, and one shop is bigger, with shorter queues and lower operating costs, what is going to happen? It is going to kill off the smaller one.

Now let's sit back and watch the free market in action.


  1. Hi GMGH,

    For those who use POSB Invest Saver? Is it okay to continue buying the NIkko AM? I guess people who use products similar to POSB Invest Saver are those who don't want to or don't know how to actively invest ya?

    Thanks for blogging :) You're a great help! Admire people like you who are so financially savvy, especially investment wise.


    1. Hi Felix,

      Thanks for the kind words!

      I would guess that those with POSB Invest Saver would be fine, since the structure of the product is such that customers do not need to deal with bid-ask spreads and the need for deep order books to soak up liquidity. Plus, the fund AUM seems large enough to support itself. I doubt DBS will pull the plug on the Invest Saver product because that would mean that Nikko AM would be entirely abandoning their ETF. Invest Saver helps prop up the Nikko AM ETF!

      That said though, I foresee very thin liquidity for the Nikko AM since most investors that buy directly off the exchange would now go with the SPDR.

      A novel point for the Nikko AM is that dividends are distributed on different months from the SPDR, so I could actually see people investing in both ETFs to get a slightly more spread out cashflow.

  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.

    1. Hi Anon,

      I will just reply to your this post here!

      Most of the people I have talked to have already switched or are planning to switch to SCB as their broker, except for the bigger boys I know that throw around $10k per counter per trade. To them, the lot size reduction now helps them only with their position sizing.

      Example: Instead of investing either $8k (1000 shares) or $16k (2000 shares) in Keppel, they can decide to invest $10k (1200 shares).

      Those who are comfortable with CDP and wary of the SCB custodian model will unfortunately have close to no benefit other than better sizing. So you are right. Only SCB clients will benefit greatly!

      Look at the SGX quotes, you will see many have fractional quotes already! I bet within a month, the newspaper or SGX will report about how the board lot reduction has increased trading volume and improved liquidity.

      It takes 2 hands to clap, and SGX is one hand while the brokers make up the other hand. As of now, only SCB is playing along with SGX. I am sure as time passes by, with the very lame promotions being offered by brokers, many many investors will be switching to SCB.

      SGX can't do anything about the minimum commission that brokers impose, but at least by lowering the size of a lot, any broker can change their fee structure to take advantage of the new system's architecture. Now it's all up to the remaining brokers to decide if they want to want profits or market share.

  3. Yea I forgot I clicked on the link above when I commented, so it appeared on the other post.

    Anyway, the impression I got was that SGX intends to boost the market by attracting retail investors. If the only action on their part is to reduce lot size, then unfortunately they are unlikely to achieve their objective. I don't believe they have zero influence on brokers, they must communicate with each other.

    Another thing is that with the closure of SCB's institutional equities business due to dwindling profits, it makes me wonder if their retail side would also be at risk in the near future and when that happens there would be less incentive for other brokerages to lower comms.

  4. Sorry if there is a double post.

    Hi. There has to be competition else SPDR wont improve. Eg Nikko AM has improved their total return performance such that they have equalled or even bettered (slightly) SPDR, due to lowering their trustee fee and changing their benchmark to STI total return. On the other hand, SPDR has done nothing to improve which benefits the investor so far. No low cost RSP tie ups (Philips SBP is not cheap for >$1000), no reduction of expense ratio, still benchmarking against price index, screwup during the F&N saga such that there is large tracking error then. So actually SPDR needs to wake up as their smaller competitor has actually done more in recent months.
    My wishlist is (1) lower TER and (2) track the broader FTSE ST All-share total return index which includes close to 200 stocks.
    - momo

    1. Hi momo,

      Thanks for the comment. I never knew that Nikko AM slightly bettered the SPDR based on all the things that you mentioned. Kind of embarrassing that they aren't performing better since they are much larger.

      I do hope that the SPDR can track total returns and lower their TER, that would make it the clear-cut winner.

      I'm not sure if an all-share index would be much different from the STI. Won't the smaller constituents really be peanuts? The STI already feels so lop-sided to me. I think doing an all-share ETF is just too much work with too little benefit for both the ETF provider and the investor.

      I would like to see a REIT ETF based on the FT ST REIT index :P I bet that would be quite popular if it had a low TER and distributions 2/4 times a year!

    2. Let's see how much dividends SPDR annouces end of this month. Their performance excluding dividends tracks the STI price index very well. So the total return performance deviation from STI total return index (minus cost of 0.30%) can only be explained by dividends.

      Please help to also write to to feedback on your wishlist for staying competitive. :p
      - momo

    3. I just noticed the announcement on 26 Jan.

      Jul 2014 Nikko 0.0465
      Aug 2014 SPDR 0.045

      Jan 2015 Nikko 0.0495
      Feb 2015 SPDR 0.048

      My gosh what is happening to SPDR...
      - momo

    4. :O !!!

      Oh man, Nikko AM fighting back strong? Is it because of the change in Nikko AM's distribution dates? I must closely monitor now!

    5. sorry should use dividend % instead. anyway the pt is total return performance of nikkoam is now not worse and even slightly better than spdr (as of 31 dec 2014)
      - momo


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