Deutsche Bank has recently launched another ETF in Singapore. This is in addition to the four they launched earlier.

The DBXT FTSE Vietnam ETF tracks the FTSE Vietnam Index and started trading on SGX on 25th March 2009.

The ETF will be quoted in board lots of 10 units and priced in US$ with a minimum bid size of US$0.01.

Here’s a tip for buying ETFs that are based on stock markets overseas.

As we all know, most of the ETFs have market makers to provide liquidity to the ETF. The bid-offer spread they quote will depend very much on the liquidity of the underlying market. The more liquid the underlying market, the better the spread.

This implies that when the underlying market is closed, the spreads will be the worst. Therefore, one should always try to buy an ETF when the underlying market is open.

Using DBXT FTSE Vietnam ETF as an example, the Hanoi and Ho Chi Minh stock exchange is open from 9am to 11am daily (Yes, they only operate for 2 hours every day).

As Vietnam time is one hour behind us, this converts to 10am-12 pm Singapore time. In practice, the spreads of the DBXT FTSE Vietnam ETF should be the narrowest during this time.

Using a smiliar line of thinking, it goes to reason that we will never be able to get the best spreads for ETFs listed here that are based on the US market. When these ETFs are open for trading during SGX trading hours, the US market is always closed for trading!

An ETF (exchange-traded fund) is a security that holds assets such as stocks, bonds, etc and is traded on a stock exchange.

Most ETFs are passively managed and track an index (such as S&P 500 or DJIA). The manager of the ETF will buy the stocks that make up the index and then issue out their ETF units (or shares) that represent ownership of the underlying stocks. These units are then traded on the stock exchange.

To ensure liquidity for retail investors, it is important for creators of ETFs to be market makers (or appoint one) to cater for the trading of these units. 

Large institutional investors can create or redeem their units with the ETF manager directly. This creates arbitrage opportunities whenever there is a gap between the traded price of the ETF and its NAV. Therefore, most ETFs should trade at close to their NAV in normal circumstances.

For example, if the NAV of STI ETF is 1500 but it is only trading at 1400, someone can buy up the units on the market and then redeem them with the ETF manager for 1500.

Since there is very little fund management involved in passively managed ETFs, their annual fees can be as low as 0.1% p.a. As such, ETFs might be attractive to investors who would like to create a diversified portfolio that is more cost efficient than other collective investment schemes like unit trusts.

The argument for ETFs is that most fund managers underperform the market anyway, so investors are better off to just invest in low cost and passively managed investments.

Another argument is that your commission charges (<1%) are lower when you buy ETFs compared to the 2-5% bid-offer spread for unit trusts. While this might be true, note that when you buy ETFs on the secondary market, there is also a bid-offer spread involved. The spreads of the bid and offer price will depend on a few factors, one of which is the liquidity of the underlying assets making up the ETF.

Most people will associate ETFs with low cost (annual management fee). However, note that in recent years, we also see the emergence of actively managed ETFs. These are essentially actively managed funds (just like unit trusts) operating under the structure of an ETF. The fees of such ETFs would definitely be higher than the normal index tracking ETFs and might not differ much from their unit trust counterparts.

As ETFs become more popular with the investing public, we should see more of them coming to our local market. Thousands of ETFs (catering to just about every asset class you can think of) are listed in more developed markets like the US and Europe. Currently, there are  29 ETFs listed on the SGX. 5 of them are cross-listed in the US but have zero trading activity here due to the absence of a market maker.

Deutsche Bank has just launched some exchange traded funds (ETFs) on SGX. They are:

1. FTSE/XINHUA CHINA 25 ETF 
2. MSCI TAIWAN TRN INDEX ETF 
3. S&P 500 SHORT ETF 
4. S&P CNX NIFTY ETF (INDIA)

The names should give a clear indication of the region the ETF is invested it.  

The only one that needs a bit more elaboration is the S&P 500 short etf which is a form of inverse ETF. This ETF has a negative correlation to the S&P 500. It goes up when S&P goes down and vice versa.

All the ETFs are priced in USD. However, this does not mean you are exposed to the currency risk of the USD. A simple example will illustrate why.

Let’s say you own an apple valued at S$1.50. 

The apple is traded on the SGX priced in USD.

Assume the value of the apple (in S$ terms) stays constant.

If the S$ to USD exchange rate is 1.50 to 1 today, the price of the apple will be quoted at US$1. If you sell your apple, it will get you S$1.50 after currency conversion.

Now, if the USD$ collapses to 1:1 with S$, your pricing of the apple will become US$1.50 even though the value of the apple has remained constant at S$1.50. If you sell the apple and change the currency back to S$, you will end up with S$1.50.

Conversely, if the US$ strengthens to S$3 is to US$1, then the pricing of the apple will become US$0.50. If you sell the apple and convert the proceeds back to S$, you will still end up with S$1.50.

So technically, changes in the exchange rate should not affect the vaule of your apple.

Pricing assets in USD doesn’t automatically make it a USD based asset. It’s the underlying that matters.

For example, in the case of the Taiwan ETF, the Taiwan dollar to SGD exchange rate would have an effect on your returns.

DBS Asset Management (DBSAM) will be launching the DBS Singapore STI ETF on 25th February 2009. This will be the second STI ETF listed on SGX, the first being StreetTRACKs STI ETF.

The ETF is suitable for investors who would like a passively managed and low-cost fund that tracks the STI index. The initial offer period of the DBS STI ETF will be from 12 to 18 February. You will be able to apply for them via DBS or POSB ATM machines. They will be teaded in lots of 100 units.

With the launch of this ETF, there will be about 25 ETFs listed on SGX. The rest of the ETFs can be found here:

Singapore listed ETFs

As DBSAM has indicated that this will be the first of many ETFs that will be created by them, we can look forward to the growth of the ETFs market in Singapore and more choices for Singaporean investors.

Prospectus can be found here:

DBS STI ETF Prospectus

Societe Generale’s wholly owned subsidiary Lyxor Asset Management, has listed five new Exchange Traded Funds (ETF) on SGX recently. These ETFs track the performance of four Asian equity and one commodity-linked fund:

• MSCI Thailand
• MSCI Malaysia
• MSCI India
• MSCI Asia APEX 50 (an index made up of 50 stocks in China, Hong Kong, South Korea, Singapore and Taiwan)
• Reuters Jeffries CRB Non Energy

This brings the total number of ETFs listed in Singapore to 24.

For a primer on ETFs, you can visit this ETF investor’s guide page on the SGX website.