Sunday, November 25, 2012

The right investment vehicle for retail investors - ETF

It is an open secret in the fund management industry that most fund managers under-perform over the long-term (around 5 years). Very few people who are in the business of selling investment-linked products will reveal this embarrassing secret to their clients. A simple search on Google will show the facts. You can always verify next time someone persuades you to buy an investment fund. Don't blame the salesmen if they are not forthcoming because they cannot sell if all the embarrassing secrets are out.

Two years ago, I wrote about relying on fund managers for our investments. What I wrote then still stands today. I still think the average IQ of fund managers and the bottom 5% of hedge fund managers to be much higher than mine. However, it is puzzling why intelligent people under-perform as a group. A recent brief exchange with a fund manager explains the reason. Institutional investors form the bulk of the transactions, so they are the average. Add in their management fees, so they naturally under-perform the average. If we cannot rely on fund managers who are far more intelligent with much more time and resources on their hands than us, then how? What if there is an investment vehicle that outperforms most fund managers but charges a much lower fee? These are index funds and ETFs. The ETFs referred to in this article are country indices which are baskets of blue chips in the respective countries. So, if you want to invest in Singapore stocks, the right ETF is an ETF that tracks the Straits Times Index.

Cheaper and better than active fund managers, ETFs are a no-brainer for retail investors. DIY investors who pick their own stocks should review their trading records and honestly self-assess if they outperform the index ETFs. If not, index ETFs have a rightful place in their portfolio. Even for skilful ones who manage to beat the index, they can still consider ETFs if they decide to spend less time on investments and more time on their family or take on more meaningful enterprises like starting their own business.

I have yet to encounter a better writer than Andrew Hallam on ETFs and index funds in Singapore's context. Since my writings cannot hold a candle to his, please read his articles on ETFs and index funds below. 

Among ETFs and index funds, there are good and bad ones. It is for this reason that I opened a US brokerage account just to buy ETFs in the US stock exchanges. On the local exchange, the STI ETF will suit most retail investors who want exposure to Singapore stocks. I will discuss more about this in a later article.


  1. Thanks for this post, hyom. Really enjoyed reading it plus the links by Mr. Hallam :)

    1. Hi TS,

      Thanks for dropping by again.

      Mr Hallam wrote a book "Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School" which is readable even for school students. I have read the book.

      If you enjoy his articles, you can borrow his book from the National Library.

  2. hyom,

    What you say of DIY investors who can't beat the index is so true. Sometimes it's better to admit the truth and go with an passive index fund or ETF.

    On the other hand, for those (like me) that enjoy the intellectual and financial hunt for those 20% of active fund managers that can beat the index, that route is fun and profitable too - I just treat these active funds like buying into REITs or TRUST stocks in SGX (some are more equal than others)!


    No matter active or passive, the individual may have to decide whether to "market time" the market like Andrew Hallam (or Peter Lynch); or to follow John Bogle's (or Warren Buffet) buy and hold strategy ;)

    That to me has more influence on our returns than active or passive investing.

    1. Same here. Since investing/trading is a hobby, I will prefer to pick stocks for myself as long as I am not losing money or under-performing too much. Index ETFs will definitely have a place in my portfolio when I become older and my mind grows senile which is time for me to outsource to the next better player. Who better than a cheap and good passive index fund/ETF.

  3. Active Fund Managers are not the same as active retail investors.

    Active fund mangers will push up and down their transactional prices but we don't.

    That is the edge of active retail investors after years of slogging hard in the stock market. We reap what we sow.

    1. Active fund mangers will push up and down their transactional prices but we don't.

      Hi CreateWealth8888,

      I don't quite understand by what you mean above. Could you explain further?

      One edge that I think skilful retail investors has over professional fund managers is that our fund size is much smaller. It is easier for us to have double-digit percentage gains. This is why I think professional fund managers usually do better in their own smaller private fund.

  4. Could you explain why you prefer the ETFs in US to those in Singapore? Why aren't the ETFs in Singapore not as good?

  5. hi hyom. just to bring up to your awareness if you don't know about the US

    and for all other readers too

    read pt no. 6

    1. hi hyom. sorry i just saw your post on opening US brokerage account. your actions bemuse me. you are aware of the 2 tax issues, then why still go ahead with investing in US exchange?

      cost, be it in any form, matters - 1 of the classic bogleheads principle. what are your reasons exactly?

    2. Hi momo,

      Thank you for raising the 2 tax advantages Singaporeans face when buying securities on the US stock exchanges. It is important for Singaporeans to be aware of them before taking the plunge into the US market.

      As for me, it made sense to buy ETFs in the US exchanges because of the type of ETFs I bought and my investment style. For the average retail investor who just wants exposure to Singapore stocks, the STI ETF which can be bought on the Singapore Stock Exchange will suit them fine.

      It was wrong of me to make a blanket statement in the original blog post that Singaporeans do not get a good deal when they buy ETFs in their home ground. It depends on the type of ETFs. When I started off in the US market, I bought commodity ETFs and international country ETFs. I will modify the post accordingly.

  6. Most professional fund managers can't invest in good cold and under value stocks of less than 100M capitalization, unlike retail investor.
    Normally, small, under value stocks with good funamentals are the ones that gives high capital gain and growth, then the fund managers comes in and the return/yield will be low

    1. Exactly. Having a much smaller fund size is an edge that retail investors have over the professional fund managers. The scope of investment ideas that we can apply to is not limited by size of the company. On the other hand, fund managers who are charged with a huge fund size find it not worth their while to invest in small-cap stocks.

  7. Thank you very much for sharing.

    Especially the links.



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