NikkoAM-StraitsTrading ex-Japan REIT ETF or "AK REIT ETF"?

I am feeling lazy, as always, and didn't want to write about the new REIT ETF but I received so many messages that I decided, maybe, I should say something.

I didn't want to blog about the ETF because it is easy enough to understand. 

It will hold a basket of REITs, 23 to be exact, from countries such as Singapore, Hong Kong and Malaysia. 

It will distribute income quarterly and the distribution yield is estimated to be 5% at IPO.

The ETF is probably a good choice for people who want to have exposure to REITs but are too lazy to be bothered with researching individual REITs. 




OK, I understand the lazy bit but they will have to take the good with the bad in the ETF.

For people who know more about REITs, they are probably better off investing in individual REITs. 

I don't know about you but a 5% distribution yield from a REIT product is unattractive to me.

Why?









Well, remember that REITs are leveraged instruments. 

Leverage magnifies gains. 

So, the 5% yield is after magnification. 

Taking into consideration that they distribute 90% to 100% of their cash flow (i.e. they have zero retained earnings), a 5% yield doesn't seem attractive.

To me, the only good thing about the ETF is that having a portfolio of 23 REITs reduces concentration risk. 

However, if diversification is what we want, we can try to form our own REIT ETF.










Taking from my portfolio, for example, we could put together an "AK REIT ETF":

1. AIMS AMP Cap. Ind. REIT

2. FIRST REIT

3. Frasers Log and Ind. Trust

4. Ascendas Hospitality Trust

5. IREIT Global

6. Croesus Retail Trust

7. Religare Health Trust

OK, I am being a bit liberal here since not all are REITs but you get the idea.




Assuming equal weight given to the 7 components in "AK REIT ETF", we are looking at a distribution yield of more than 7%. 



"AK REIT ETF" would generate at least 40% more in income than "NikkoAM-Straits Trading ex-Japan REIT ETF".


Oh, did you notice that my REIT is also less of a mouthful? 

Yes, I know. 

Bad AK! Bad AK!










Of course, we would also have control of what we want in and what we want out. 

We could also change the weight of each component.

If we are investing in REITs for income, if we want some diversification, then, perhaps, NikkoAM-StraitsTrading ex-Japan REIT ETF is a decent option. 

Otherwise, the ETF really doesn't seem attractive to me at all.





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UPDATE (16 March 2017):
What happens if one of the REITs (or a few) in the ETF had a rights issue?
A reader found out from the horse's mouth:
"Investors in the ETF have no direct access to the rights issues.... Manager has the discretion whether to take up the rights/sell the rights..."

Ron and Dave dissect some of today’s most important REIT ETFs.

Simple investment wisdom keeps us afloat.

I found out my friend is a TV star!






What AK thinks of the LRIS:
"Since I treat my CPF savings as a risk free and volatility free component (i.e. AAA rated sovereign bond) of my investment portfolio, I am unlikely to take part in the proposed Lifetime Retirement Investment Scheme (LRIS). Of course, money in the CPF-OA doubles up as a war chest which could be deployed in the event of a stock market crash for possibly better returns than what the LRIS could deliver." Source: A cornerstone in retirement funding. 






Reader:
Dear AK, May I seek your wisdom?

1. Can CPF SA be invested on SDPR STI ETF? I have check in CPF website it stated yes.

2. However, I went to OCBC where I have CPFIS account to ask, OCBC staff not able to reply.

3. I ask approved CPFIS broker they cannot answer as well.

Is there some place I can seek clarification, please enlighten me. Thanks

AK replies to reader:
I don't think the questions have anything to do with wisdom.

1. Er. I dunno.

2. Er. I guess they dunno.

3. Er. Ask CPF Board.

Now, I will share something which (hopefully) has something to do with wisdom. I wouldn't risk a AAA rated sovereign bond paying 4% to 5% coupon for an ETF.

Best wishes,
AK





A bird in hand is worth two in the bushes (provided that they are of the same size). If AK says so, it must be so.

Related posts:
1. Will AK invest his CPF money?
2. My CPF-SA outperformed.

Matthew answers questions on STI ETF (Part 2).

Thank You and Matthew Seah for the help! Appreciate it  I still have a few more questions to ask regarding STI ETFs which would require Matthew's or your help.  

SPDR STI: 

1) Matthew mentioned that "It is wrong to say that they paid $12M when they had $5M in cash. What you see as cash is only a snap shot “at 30 June 2015”. What has been paid out is cash they had previously from dividends collected over the six months prior, less management fees. " Based on this, am i right to say that net income would be a better gauge to determine whether the fund is paying dividends more than it can afford?

2) There is a significant increase in liabilities in 2013 due to purchases awaiting settlements. What purchases did they make? And how did they manage to pay off such a large amount by 2014? 

3) There is a change in source of credit rating in 2015. And the rating as a result improved from B*- to AA-. Did they change the rating source in order to improve their credit rating? Is this a source of concern?

Nikko AM STI:

1) Why is there suddenly an amount due to shareholder in 2015 under payable? 

2) The tracking error provided by nikko am is on a 3year annualised basis while for spdr, it is based on rolling 1year tracking error. Is it fair to compare this 2 tracking error directly? Is it sufficient to just look at the current tracking error in the fact sheet or should i look for past years tracking error of both ETFs? Where can i find past years tracking error of both ETFs? It wasn't in the annual report.

General: 

1) Would my returns be better if i chose to start DCA under a RSP plan when the index is cheaper as compared to when the index is higher?

Thank you and looking forward to your reply! 

From Matthew Seah:

SPDR STI 1) yes
2) The only liabilities the fund has is payables. Payables come mainly in the form of cash due to the brokerage at T+3. Since STI ETF is a cash ETF, they would have sufficient cash before purchasing the STI components.
3) you can review the credit ratings at http://investors.statestreet.com/CustomPage/Index?KeyGenPage=302726

Nikko AM STI ETF
1) Distribution payable is the cumulative dividends, less fees collected to be distributed to shareholders on a semi annual basis.
Are special dividends from any STI components? Is there a change in dividend yield when there is a switch of a STI component?
2) I am not sure where to find tracking error. But you can calculate by yourself.using excel and historical data for STI, SPDR and Nikko AM ETFs. The tracking error is generally very low and is not much of a concern.

General
1)http://singaporeanstocksinvestor.blogspot.sg/2013/08/tea-with-matthew-seah-dollar-cost.html
read the comments as well for the Nikko AM STI ETF simulator
one ETF starts before the great financial crisis, the other starts near the bottom



Related post:
Matthew answers questions on SPDR STI ETF.

Matthew Seah answers questions on SPDR STI ETF.

Dear AK,

I am SH, one of your many blog readers. I am currently 21 years old and i am planning to make my first investment through a STI ETF. (Still deciding between spdr and nikko). However i have quite a number of questions regarding SPDR STI ETF; especially after reading its annual report, which i hope you can help to clarify.

These are the questions:

Unitholders’ contributions/(withdrawals)

Creation of units:

2015: 31,366,855

2014: 59,145,817

Cancellation of units:

2015: (149,927,298)

2014: (6,664,213)

Change in net assets attributable to unitholders resulting from net creation and cancellation of units:

2015: (118,560,443)

2014: 52,481,604

Distributions NOTE4

2015: (12,106,500)

2014: (10,726,000)

Total (decrease)/increase in net assets attributable to unitholders:

2015: (109,105,696)
2014: 69,068,372

QN: I found the above information in the annual report but I couldn’t understand what it means. Can you explain?

Matthew Seah: "Each unit of STI ETF is a share of STI ETF. Units are created or cancelled due to the injection of fresh funds or the withdrawal of money from the fund respectively."

Qn: 1 What is net asset attributable to unit holder? Does it just mean net asset value?

Matthew Seah: "Net asset attributable to unit holder is the net asset value, after fees are deducted for selling all the stocks and derivatives (if any) that the fund owns to convert everything into cash."

2 What is collective investment scheme?

Matthew Seah: "A collective investment scheme is a scheme which pools moneys from many people for the sole purpose of investing the pooled funds.

"Mutual funds, unit trusts, endowments and ETFs are examples of collective investment scheme."

3 Quoted derivatives in the form of nil paid rights from Jardine C&C on 15/07/15. What does this mean? I heard that spdr etf uses derivatives to try and minimise tracking error. Is this a significant proportion? What are the risk of it?

Matthew Seah: "Jardine C&C has made a rights offer of 1 for 9 shares.

Click to enlarge.

"STI ETF owns 112,541 shares of Jardine C&C.

"That equates to 12,504 rights that you see on the annual report."

4 If they pay dividends from cash, it seems that they are paying out more than what they have. They only have S$5M+ of cash but paid out 12M+ for 2015?!

Matthew Seah: "It is wrong to say that they paid $12M when they had $5M in cash. What you see as cash is only a snap shot “at 30 June 2015”. What has been paid out is cash they had previously from dividends collected over the six months prior, less management fees.

"Likewise, suppose your bank account has $5,000. It would be erroneous to say the $12,000 you have already spent is more than what you originally had, which was $17,000."

5 Does portfolio turnover ratio have different meaning if the calculation is based on purchases instead of sales? Is lower ratio better?

Matthew Seah: "For a turnover to happen, $1 in stock A have to be sold to purchase $1 in stock B. The portfolio turnover ratio will be the same regardless of purchase or sales.

"A higher purchase happens when there is a net investment inflow, i.e. more investors buying STI ETF units. Alternatively, a higher sales happens when there is a net investment outflow when investors liquidate their holdings. However, these higher purchases/sales numbers are not turnover as no portfolio rebalancing occurs.

"A lower ratio is better."

6 There is a significant increase in portfolio turnover ratio from 31Dec 2014-2015. It jumped from 0.94% to 9.77%! Do you have any idea why it is so? Is it due to the replacement of 3 of sti constituents in 2015? It is considered a one-off kind of thing right?

Matthew Seah: "It is indeed caused primarily by the replacements of STI constituents. It would be one-off when FTSE does not change the constituents on a regular basis. Generally, investors would consider such rebalancing to be one-off."

7 There is a significant increase in payables in 31 DEC 2015 compared to 30 JUN 2015. Is it due to the losses incurred due to the changing of constituents in STI?

Matthew Seah: "Payables in the ETF comes in 2 forms:

"‘Accruals for expenses’ and ‘Amount due to the Manager’. It just meant the fund owes money to to the Manager and third parties. These have nothing to do with losses incurred."

8 Is there a chance/under what circumstances the sti etf will close down?

Matthew Seah: "STI ETF is unlikely to close down."

9. If you are the one considering to buy the sti etf, other than the tracking error, expense ratio, portfolio turnover ratio, p/e, what else would you look at when analysing this etf? Would you read into the past years’ annual report?

Matthew Seah: "Nothing else, really. You should read past annual reports to compare all the parameters you have mentioned to ensure that the Manager has kept tracking error, expense ratio and turnover ratios low, or lower (better) over the years."

10. Where can I get past few years of annual report? I can only find annual report for 2015 and the semi-annual report for 31DEC 2015 on the official website
Matthew Seah:"You can contact them at http://www.spdrs.com.sg/contact/index.html"

Read another blog post on ETFs by Matthew Seah: HERE.

Tea with Matthew Seah: Exchange Traded Funds (ETFs).

ASSI's most prolific guest blogger, Matthew Seah, readily agreed to contribute this guest blog when I asked him if he could do it. Such an obliging and intelligent fellow.

During the 4th “Evening with AK and friends” session, a young man mentioned cash-based and synthetic ETFs. After some discussion, AK shot an arrow for me to do a guest blog on ETFs, so here it is.

Firstly, exchange traded funds (ETF) are investment funds that can be traded on the stock exchange, hence the term ‘exchange traded’.

The main objective of an ETF is to replicate the performance of a basket of stocks of an underlying benchmark. An ETF is a passively managed fund and generally charge lower fees compared to actively managed funds. Hence the kind of returns you can expect from investing in an ETF is equal to the performance of the underlying benchmark minus management fees.


Alright! Now ETFs can be categorised into 2 broad types: cash-based or synthetic.

Synthetic ETF

Synthetic ETFs are more complex than cash-based ETFs. Synthetic ETFs creates a similar benchmark with the use of derivatives such as options, forwards, swaps and participatory notes. Like with all derivatives, synthetic ETFs are all Specified Investment Products (SIPs) on SGX.

As the use of derivatives are complex and often non-transparent in nature, MAS has kindly restricted trading of synthetic ETFs by requiring investors to go through customer knowledge assessment before they can trade synthetic ETFs.

Cash-based ETF

Cash-based ETFs are simple funds that allocate whatever capital pooled into the fund into a similar portfolio as the underlying benchmark. For example, the capital in Nikko AM STI ETF is used to invest in the 30 STI components stocks according to the weightage of each stock in the STI.

This is a preferred form for the safety seeking investor, as no third party credit risk is involved.


So what are the added risks involved in synthetic ETFs not found in cash-based ETFs?

Synthetic ETFs enter into contracts with third parties, or counterparties, when using derivative products. Hence there is counterparty risk where the counterparty might default on their obligations. Thus, your returns will depend on the ability of the counterparty to honour its commitments to the ETF.

With derivatives, leverage may be used to increase returns. While leverage may generate higher returns, it could also cause the ETF to lose more than the market.

Conflict of interest may occur when the counterparty and the ETF are from the same financial institution.

You can find out more about how ETFs are structured and their risks here.


How do I know if the ETF is synthetic or cash based?

Highlighted red is where you can determine if an ETF is synthetic or not. A ‘X@’ in the SIP column would indicate that the ETF is synthetic.

A ‘@’ indicate that the ETF is an SIP and customer knowledge assessment is required.

An empty box, i.e. ABF SG Bond ETF, indicates that the ETF is a cash-based ETF.

Why do ETFs use derivative products?

1. Some markets like many emerging markets are inaccessible to the ETF, hence derivative products have to be used in order to gain access to the stocks.
2. Derivatives when used properly, are hedging tools and can reduce risks and improve portfolio management for the ETF.

Lastly, as a result of doing some search for more information, I have found that the MAS converted some ETFs, previously classified as SIPs, to excluded investment product (EIPs). The ETFs that were converted to EIPs will be predominantly cash-based and only use derivatives for efficient portfolio management including the hedging of risks.

Therefore, you would expect those with only a ‘@’ to eventually convert into an EIP under the new framework.

Here is the list of ETFs I found online:

"Following strong market feedback that earlier versions of the Specified Investment Products (SIP) regime had been overly broad, the Monetary Authority of Singapore (MAS) has tweaked its rules to exclude simple funds from the often cumbersome safeguards required to invest in more complex products.

"In a bid to encourage investments in exchange traded funds (ETFs), Singapore Exchange (SGX) will also waive ETF clearing fees from June 1 to Dec 31, 2015.

"Under the previous rules, products such as gold exchange traded funds and funds that invested in a particular country were treated the same way as leveraged products or those that tracked synthetic benchmarks. Under the SIP framework, investors who wanted to buy those products had to be assessed by their financial institutions for their ability to understand those products. A lack of competency or experience in understanding those products would require additional safeguards to be put in place before the investment could be allowed.

"But the new rules, which took effect on Wednesday, carved out exemptions from the SIP requirements for funds that trade in gold as well as those that use derivatives only for hedging or efficient portfolio management purposes."

(Source: The Business Times, 30 April 2015.)

Thank you, Matthew!

Related post:
The 4th Evening with AK and friends: A success!

We are not perfect but we can improve our lives.

Hi AK,

I am also pessimistic, actually. The thing I realised these couple of months is in life things can be unfair or by a stroke luck fate deals a bad set of cards or bad things happen because of my incompetence.

However, whatever situation one is in, the cliche of being optimistic that's sold by people may not be too practical. What's practical I find is to be able to do something even a small little thing to be better off. Because I believe little things do add up. Of course, sometimes trying to improve can backfire or backslide but it's just part of life. No one is immune to failure lest they do nothing at all.

When I go out, I do see people working in jobs they cannot extricate themselves from and bosses that exploit people. I mean if they could they would have changed jobs or found a way to have a higher salary. So, not all people are fortunate enough to move into a better situation. I think they call it social mobility.

On the part of feeling very pessimistic, I can understand that. Take, for example, the guy that works at the train station control or the driver or technician or maybe even the engineer. 

Faced with stagnating wages and rising costs and the worst part is the company they work for has long ago categorized them into the lowest ranks in the company. Their advancement may not be existent. So, there is not much hope if u look at it. 

Who is going to help them? 

So, when they start thinking about retirement or old age it can look very bleak for our current generation. The government may look rich but they have other issues to think about as well. The countries around the world may not be as friendly as they seem to be.

But through proper planning and use of excess funds, however little, or to restructure the way their resources are being used or allocated, I believe people can improve their lives. The problem is, I feel, nobody told them how to do it. So, since no ideas were planted, nothing can grow.

So, I think if the SGX changes the board lot size to 1 share come next year, it can really help people who don't have much. Finally, they can own blue chips and, hopefully, reduce their risks. 

People would just have to pay a one time charge with Standard Chartered that's only 0.2% with no minimum fee.  At the very least, they can grow with the economy. 

Even people who don't know anything about stocks, they can just create their own index rather than depend on the ETF which has additional expense or blue chip share building program which I feel is restrictive.

A peeve I have with the STI ETF is that it is hard to sell. I bought the Nikko once and took a long time to get rid of my 100 shares and the pricing wasn't good. So, I gave up on that and just went to buy the blue chip instead. U know in some blogs people sing praises of it but I am not sure if they actually tried to sell it. 

I personally feel there's a bit of untruths to the STI ETF. When they took the 8% y-o-y growth, they were measuring the years where there was a nice increasing slope. However, if one bought at other periods, the return just doesn't look that good.

The flip side of the coin is people, by nature, want quick solutions. 

If I tell people u know u get 1.5% extra or u can save 100 dollars in tax every year, nobody is really going to take notice. But they are very interested in TOTO and 4D and making a quick buck in the financial markets, university graduates included. 

It is only after a long time, through some event happening, that some of the lucky ones will start to work on their lives and the extremely lucky ones meet someone who would hold their hands.

My reply:

....

Till today, I tell people that my ideas are simple but to really see them through might not be easy. I also tell people that I have been lucky and, in life, we always need a bit of luck, investments included. Sometimes, things do go wrong, like you said, and it could well be due to my incompetence too. No one I know has had a life that is smooth sailing always.

I do share your concerns and I do want to help people, especially those of able body and mind who think that it is impossible ever to be financially free. This has been a driving force behind many of my blog posts.

For sure, every little bit adds up. We just need discipline and time for results to show. Problem, like you said, is that people cannot seem to wait.

When I tell people that 4% is a whole lot more than 2.5%, they usually tell me that it is only 1.5% more. I would tell them that they are wrong. It is actually 60% more! It is simple that way but they could not see it. Some saw it and their eyes lit up but some just chose to be fatalistic and ignore the revelation.

I like it when you say how people can improve their lives and I always say that everyone's life could be and should be better.

.....

“No matter how great the talent or efforts, some things just take time. You can’t produce a baby in one month by getting nine women pregnant.”
– Warren Buffett

Read Klein's earlier emails to me:
Tea with Klein: CPF, SRS and HDB housing loan.

Related post:
Take your time to pay down your HDB housing loan.

SRS: E-book and a brief analysis.

UPDATE (YA 2018):
Taxpayers who make SRS contributions on or after 1 Jan 2017 should note that the overall personal income tax relief cap of $80,000 applies from YA 2018 (when the income earned in 2017 is assessed to tax).
Read: SRS INCOME TAX RELIEF.
Feb 16, 2017
See examples:
https://www.iras.gov.sg/irashome/Individuals/Locals/Working-Out-Your-Taxes/Deductions-for-Individuals--Reliefs--Expenses--Donations-/#title7



----------------------------

SRS e-book

Recently, I came across a couple of blogs talking about the Supplementary Retirement Scheme (SRS). 

Over the years, whenever I talked about how I started an SRS account from the time the scheme was introduced in 2001, listeners would be incredulous. I was only 30 years old in 2001. To me, the tax benefit was too obvious to be ignored. Since 2001, I have contributed to my SRS account up to the maximum sum allowed yearly.




In a blog post on 24 Dec 2009, I mentioned that "As long as a person is paying income tax, he should start an SRS account and contribute to it yearly so that he pays less income tax (or none at all). For me, it's that simple." 

Well, it might be that simple for me but for people with many financial commitments, it might not be so. For these people, they might not have much money leftover after taking care of all their routine expenses. So, voluntary contributions to the SRS account could be difficult.

Having said this, as long as we are paying income tax, voluntary contributions to our SRS accounts should be viewed as an important part of planning for our retirement. We should try to include it in our retirement planning.






Voluntary cash contributions to the SRS account are eligible for tax relief. For some, contributing just a few thousand dollars a year could mean not having to pay any income tax. So, there is no need to contribute the maximum of S$11,475 per annum. This is the maximum allowed for Singaporeans and PRs.

Therefore, I would suggest that we look at how much of our income is taxable and to contribute to the SRS account sufficiently to become free from income tax. After all, funds in the SRS account should not be withdrawn till the statutory retirement age to avoid penalties. So, cash in hand is still better than being in the SRS account.




Of course, if our taxable income is much higher, contributing the maximum sum allowed would save us much in income tax although it might not mean being free from income tax. How much to contribute, if ability allows, therefore, depends on individual income levels.

Money in the SRS account could be used to invest for higher returns. Examples are fixed deposits, single premium insurance policies, shares, REITs, ETFs and unit trusts. SRS funds cannot be used for purchasing real estate, for example.







Upon reaching the statutory retirement age of 62, if we had been making regular contributions and investing prudently, money in our SRS accounts could be an important part of our retirement income. 50% of the funds withdrawn upon retirement would be subject to income tax. If we keep our yearly withdrawal within the non-taxable bracket which I believe is $20K, we would not even have to pay any income tax.

So, theoretically, if we had $200K or less in our SRS accounts by the time we retire, withdrawals could be non-taxable. Withdrawing the funds in ten equal portions over a period of ten years would lower the income tax payable if we had more than $200K in our SRS accounts by the time we retire.

For anyone paying income tax yearly and still wondering if the SRS is necessary, do consider the points I have made in this blog post. Financial security in our old age is one of the most important things we have to plan for in life.




UPDATE (18 July 2014):
The maximum contribution allowed for the SRS account now is $12,750 per annum.

NEW: From 2016, max contribution is $15,300.

Read Supplementary Retirement Scheme.
Updated Booklet on the SRS: HERE.

From the FAQ section on SRS in MOF's website.

Update:
"... the caps on contributions to the Supplementary Retirement Scheme will also be raised to $15,300 for Singapore citizens and permanent residents and $35,700 for foreigners."Source: The Straits Times, 23 Feb 15.

Related post: Double your income, not your income tax.