ETFs — Bucking The Trend For Want Of A Quick Buck

IS SOMETHING amiss with Exchange-Traded Funds  funds (ETFs) in Singapore?

They seem to have lost their lustre in the Singapore bourse. Many continue to be delisted this year for a variety of reasons, likely precipitated by the lack of interest shown by retail investors.

The lethargy and low turnover in the ETF space in Singapore is at odds with burgeoning demand for ETFs in the developed world, with institutional investors leading the charge.

In the US, for example, total ETF assets under management grew from US$996 billion in 2010 to US$2.53 trillion by the end of 2016, according to data compiled by Deutsche Bank.

Over the same period, ETF assets in Europe rose from US$309.3 billion to US$570.3 billion, while ETF assets in Asia including Japan expanded from US$84.2 billion to US$314.4 billion.

This represented the fastest growth among the three regions, albeit from a much smaller base. In Asia, equity-based ETFS are the most popular, followed far behind by fixed-income ETFs. Japan and Korea are the biggest ETF markets in the region, though the Bank of Japan is the main driving force for ETF purchases in its country.

A Variety Of Options

ETFs have particularly caught the eye of long-term investors, who like the low volatility generally associated with these products which they feel adds stability to their portfolios. ETFs provide exposure to a wide range of thematic investments that otherwise would be hard to access, especially for retail investors.

For instance, among the ETFs currently listed in Singapore, an investor can gain country-specific investment exposure, invest indirectly in high-yield bonds, put some money into an ETF that tracks the Dow Jones Industrial Average and also gold prices.

ETFs are great for diversifying portfolios. They are also relatively low cost because most of them are passively managed since they only track indexes. These qualities do not seem to interest retail investors in Singapore, and consequently the ETF market in Singapore is in a funk.

The reason for this is simple: Singaporeans seek the excitement of making a quick buck and like to punt stocks.

ETFs don’t lend themselves well to this sort of short-term trading behaviour. ETFs, especially those that track market indexes, do not offer alpha, or excess returns above the gains of the indexes that they track. They tend to rise or fall in tandem with them.

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But there are areas where demand for ETFs could grow in Singapore. They are being introduced more into the portfolios of investors, both institutional and retail. Financial advisors, relationship managers and private bankers are increasingly recommending ETFs as a core part of portfolios.

This is a positive development for ETFs and the investment landscape in general. In the recent past, ETFs were not really recommended for portfolios because they didn’t make much money for the people recommending them in terms of fees. But that is changing now with a slow shift away from a commissions model to fee-based advisory services.

Digital Play

Against this backdrop, the Monetary Authority of Singapore (MAS) may have also taken a key step towards boosting the ETF market when it recently put out a consultation paper that moved to support the growth of digital advisory services, also known as robo-advisory services.

Digital advisory services are gaining traction in the US and Europe because they offer ordinary investors investment services that more sophisticated investors typically receive, including portfolio advice and rebalancing of portfolios. Robo-advisory services represent an ongoing democratisation of financial products and services, enabled by technological developments.

Most robo-advisory services available so far recommend portfolios in which the underlying products are ETFs. In fact, the MAS proposed that robo-advisory firms can manage retail investors’ money if they have the technology and management expertise, and only recommend portfolios that are at least 80% invested in ETFs.

If robo-advisory services catch on in Singapore, this could give the ETF market in Singapore a boost. However, with many investors in Singapore still of the short-term investing ilk and not appreciating the value of adopting a more staid, long-term investment stance, it will not be an easy road for the robo-advisory space to gather assets going forward.

With the imperative of saving for retirement looming large for many Singaporeans, some regulatory push may be needed to get things moving.

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