Hello, recently I have been looking into something called Exchange Traded Funds (ETFs) and I'll share my views about it.
There might be some jargon surrounding this area, not unlike any other investment assets. ETFs are basically a fund, or a basket of stocks that are listed and traded under a single stock. These stocks mirror the performance of whichever index they are tracking, in our case, the Straights Times Index (STI).
My apologies if I couldn't explain everything about Indexes and ETFs here as it isn't really the point about this post, but if you wish to know more you can always read up on it. I would say feel free to approach me and I'll teach you but in my opinion my knowledge isn't that substantial to express that kind of statement.
Technicals
Okay, so why am I interested in this particular ETF? Lets take a look at the graph below.
As we can see, from the low of 2011 at $2.58, it has risen to a peak of about $3.55 in April 2015, that's a $0.97 increase - nearly 38%. Lets assume that one didn't manage to get in at the lowest, so you bought in around that period at $2.70, when it peaked there's still a nice gain of 31.4%.
Fundamentals
Following the recent China economic crisis(is it considered a crisis yet?), the share price dropped to yearly lows of 2.90 (15/09/15). That is a 18% plunge from its peak in only a month. While there are many factors attributing to the plunge, such as
- Interest rates hike decision from the Fed
- Slowing China economic growth
- Plunge in oil prices
One would say that there is basically nothing wrong with the companies. Therefore when a external factor brings down a company's price by a huge margin, we can see it as a bargain buy instead. However, it would be a huge proclamation declaring that THIS certain company is undervalued. We aren't part of its management and assuming we didn't dig deep into their financials. Even so, there is no way one can guarantee that this company's shares is going for a bargain and will definitely rise.
Understanding the market
So, in such a financial downturn and so many companies are affected by it, which should we buy? Singtel? Keppel? SIA? These are all blue chips that costs thousands of dollars per lot, and I definitely do not have enough money to diversify among everyone of them. I also feel that dumping all my asset into one stock doesn't make sense. Therefore I'm buying all of them. Wait what? All of them?
This is where the STI ETF comes in. If one were to ask me whether Singtel could make a recovery from its $4.50 to $3.60 plunge, the best answer I could give is maybe? probably? I can instead give a more reassuring answer that 'the market will probably recover'. I don't know how long it will take, it might take just months or years. Currently the market is still gloom about shares given the economic slowdown and the rate hike, so I would say a sharp recovery seems unlikely. However a slow and sustained hike up would be very possible.
Looking at the graph above, the share price isn't shaking much out of it's channels and this probably shows a sentiment that investors have absorbed the negative news and is moving on. A swing towards the downside in the economy frequently causes investors to jitter and start a massive wave of sell-offs, including fund managers, institutions and individual shareholders. These sell-offs of individual stocks such as Singtel, Keppel corp, etc. WILL ultimately impact the STI, which in turn causes the STI ETF to plunge as well. There might be individual companies still experiencing sell-offs while some might be gaining traction to recovery. However, my inference from the data shown is that since Aug 24, the sell-offs have started to cool down and investors are mainly sitting on the sideline for now. Given that the general elections are over, any sentiments about government instability should probably be reflected in the stock price now (which doesn't seems to be negative).
My opinions
Personally I feel that the market shouldn't be going any deeper unless further distressing news occurs. After a plunge like this and knowing what caused it, I am more confident that the upside will be seeing some air soon.
Not forgetting DIVIDENDS
Assuming the market stays stagnant or continue hovering downwards in the future years, this ETF still pay out a decent dividend yield in the high side of 3% yearly, with semi-annual payouts typically in February and July.
Given that the STI ETF hasn't seen much of the ~$2.90 zone since the 2012 global recession, it would seem like a good buy for the Singapore economy to let it appreciate in the future.
Should you want to know more about this particular ETF, SPDR (the creator of the ETF) has generously summarized and explain everything here:
http://www.spdrs.com.sg/etf/fund/fund_detail_STTF.html
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