Monday, July 7, 2014

SGX ETFs: Case Study on Spreads and Market

I've been thinking about getting some ETFs into my regular portfolio. SGX does have ETFs, and I do think that a good ETF can definitely play a good role in a long term portfolio.

Correct me if I am wrong. SGX has the biggest offering of ETFs in the Asian market. From their ETF section on their website, I managed to pull out 96 ETFs. Of this 96, 7 are double counted because they are dual-currency ETFs, so each currency version gets it's own line item. So in total there are 89 different ETFs, with 7 providing an option to buy/sell in either USD or SGD.

Even though I am only concerned with the SGD listed ETFs because I really have no faith in the USD as a long term currency, I extracted all the data from the 96 difference line items and did a small research on their bid-ask spreads.

This is just a simple end-of-day snapshot of the bid and asks. Sure, it might not be entirely representative of their normal spreads, but I think it is definitely a good start to look at things.

Results
Of all the 96 ETFs, 2 did not even have bid-ask quotes. (IS DJIA and S&P500)
Average spread is 0.65%
Max spread is 4.84%, while Min spread is 0.06%

3 ETFs has excellent spreads under 0.10% - Lyxor World, SPDR GLD and DB Inverse S&P500

23 ETFs has good spreads between 0.11% - 0.30% - All 3 ETFs indexing the local benchmarks were in this category. They are Nikko ABF, Nikko STI and SPDR STI.

41 ETFs has spreads between 0.31% - 0.75%

20 ETFs has horrible spreads between 0.75% - 1.50%

6 ETFs has horrible spreads of over 1.51 - 2.00%

1 ETF has a ridiculous spread of 4.84% - Lyxor HSI

SPDR is definitely the #1 ETF provider, with average spreads of 0.14% and a range of 0.07% - 0.30%. They only have 4 products, but they are the 4 most popular ones to trade.

DB is next best with a decent range of products with good market making support. Average spreads of 0.35% and a range of 0.08% - 0.75% .

iShares has average spreads of 0.75% and a range of 0.36% - 0.99%. Their equity offerings and bond offerings has a clear and big divide.

Lyxor has average spreads of 1.16% and a range of 0.06% - 1.97%. They have a very broad offering, but a broad range too.

Anyway, here is the simplified version with only the SGD counters (sorry I'm self-serving, these are the only ones I'm interested in), there are just 11 of them.


Nikko is doing extremely well, with both their only 2 ETFs ranking top spots. I am impressed by the tightness of the spreads on the ABF. However, point to note is that the dollar amount that they can absorb before the book order moves to the next rung is not very high at all, between $15k-20k. Keep that in mind when placing big trades.

As impressed that I am of the tight spread for the ABF, the ABF is not an index that I would ever like to buy. Portfolio YTM is 2.2% but fees are 0.2%, making yield just 2% with a duration of 6.25 years. Sure, the portfolio is AAA, but I do not find value paying such amounts for having a lower credit risk.

The iShare bond ETFs seems edible. I suppose you can think of the spreads as a 1% sales charge and exit charge. It's not very exciting, and I think the costs puts me off from trying these ETFs.

CIMB and UOB have interesting product offerings with SGD support, but bad spreads and horrible AUM. I have a feeling that they will be delisting their ETFs soon, since I am very certain these ETFs are making them bleed. Honestly, the CIMB ETFs look very appealing and enticing to me as a long-term investor. But with a 2% entry and exit charge, I am not impressed.

All in all, my wishes for the SGX ETF landscape are the same wishes any ETF investor would wish for:
1) Local currency support (convenience to trade)
2) Hedged ETFs (isolation of risk factors)
3) Reasonable expense ratios + AUM (longevity of the ETF)
4) Tighter bid-ask spreads (reduced transaction costs)

I actually think that the range of products is actually very broad. My biggest gripe is the current mandate that you can only invest using US$. Not only do investors incur conversion costs both ways, currency risks is now introduced and the cost, knowledge and skill of hedging is introduced in the picture.

Won't you make my wish come true, SGX and ETF providers?

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