Post on 18-Jul-2020
Page 1
How To Build A Powerful Portfolio
With Top Global ETFs
Tan De Jun
Equity Analyst, Stocks and ETFs Research
Page 2
Outline
• Exchange Traded Funds 101
• Things You Should Consider Before You Select An ETF
• Introducing The ETF Focus List
• Investment Strategies Using ETFs
• Sample ETF Portfolio
Page 3
Exchange Traded Funds 101
Page 4
Introduction To ETFs
• ETFs are a cross between a stock and a fund.
– Gives investors access to a portfolio of stocks, bonds
or other asset classes, providing diversification
through a single trade.
– Offers investors the flexibility of buying and selling
anytime during market hours.
• Index tracking funds that trade like stocks on an
exchange.
• Primary objective of an ETF is to replicate the
returns of its underlying index.
• ETFs are mostly passive instruments designed
to be the market, not beat the market.
FundsDiversified
ETFsDiversified like funds and trade like stocks
StocksTradable during market hours
Page 5
Popularity OF ETFs Over The Years
• Between 2008 and 2017, ETF assets
under management (AUM) grew at a CAGR
of 25%, to more than USD 4 trillion today.
• There are over 4000 ETFs today that track
almost every major indices for stocks,
bonds and even commodities, offering
exposure to virtually every corner of the
market.
Page 6
Reaching Every Corner Of The Market With ETFs
Type Exposure
Equity
STI ETF Singapore’s equity market
VanEck Vectors Semiconductor ETF US semiconductor industry
Fixed Income
Nikko AM SGD Corporate Bond ETF Singapore’s corporate bond market
Commodities
SPDR Gold Shares Price of gold
Smart Beta
Vanguard Growth ETF US large cap growth stocks
Leveraged & Inverse
Samsung HSCEI Daily (2x) Leveraged Product 2x daily returns of the HSCEI index
Page 7
Leveraged And Inverse ETFs
• Leveraged ETFs seek to amplify the daily
returns of its underlying index.
• Inverse ETFs aim to deliver a return based
on the inverse performance of its
underlying index.
• Both are used mainly for short term
speculation, and not meant to be held for
the long term.
• Risky products that can run up huge losses
in a short span of time.
1%
-1%
2%
-2%
-1%
1%
-3%
-2%
-2%
-1%
-1%
0%
1%
1%
2%
2%
3%
Index Return 2x Leveraged ETF Inverse ETF
Index Up
Index Down
Page 8
Benefits Of Using ETFs
• The average expense ratio of an ETF is generally lower than active mutual funds, helping investors save costs.
Cost Efficient
• A single ETF is made up of several individual securities, ETFs are highly diversified investment vehicles.
Diversification
• ETFs offer access to various markets and asset classes that may not be accessible to retail investors.
Accessibility
• ETFs can be traded at anytime during market hours, allowing investors to enter and exit positions quickly. The exact price of the transaction is also known.
Trading Flexibility
• ETFs are highly transparent in their holdings, with most of them disclosing their holdings daily.
Transparency
Page 9
Things you should consider before you
select an ETF
Page 10
Exposure: Know What You Are Buying Into
• Understand the index
– What does this index represent?
– What are its top 10 holdings?
– Index methodology? E.g. (market
cap/equal/price weighted?)
• How closely has the ETF tracked its
benchmark?
– Tracking difference is the difference between an
ETF’s performance and the performance of its
underlying index.
– A small tracking difference is desirable as it
ensures that investors are getting the same
exposure as the underlying market.
– Contributors of tracking difference are expense
ratios, representative sampling and securities
lending.
Page 11
Structure: Physical vs. Synthetic
• Physical ETFs can either be fully or partially
replicating.
• In partial replication, the ETF holds only a
sample of the index.
• ETFs with a large number of constituents and
those with less liquid securities typically use
partial replication. (E.g. Bond ETFs)
• Partial replication is a source of tracking
difference.
• Synthetic ETFs are normally used for restricted
markets, commodities, leveraged and inverse
products.
• Synthetic ETFs exposes the investor to
counterparty risk.
Physical ETFs Synthetic ETFs
Underlying Index
Securities
Swaps &
Collateral
Counterparty
Risk
Limited High
Page 12
Expense Ratio: Every Cent Matters
Expense Ratio
0% 0.5% 1% 1.5% 2%
Year 0 $10,000 $10,000 $10,000 $10,000 $10,000
Year 1 $11,000 $10,950 $10,900 $10,850 $10,800
Year 2 $12,100 $11,990 $11,881 $11,772 $11,664
Year 3 $13,310 $13,129 $12,950 $12,773 $12,597
Year 4 $14,641 $14,377 $14,116 $13,859 $13,605
Year 5 $16,105 $15,742 $15,386 $15,037 $14,693
Impact On Returns
($)-$0 -$363 -$719 -$1,069 -$1,412
Impact On Return
(%)-0% -2.25% -4.46% -6.64% -8.77%
Source: iFAST Compilations; Data in USD terms
Page 13
Assets Under Management
• Assets under management (AUM) is a measure of the total market value of assets an ETF
holds.
• ETFs with large AUM tend to have lower expense ratios as expenses are spread across a
larger asset base.
• ETFs with larger AUMs will also tend to have higher liquidity.
Page 14
Liquidity: Ease Of Buying And Selling
• Liquidity is a measure of how easy or
difficult it is to buy or sell an ETF quickly
without affecting its price.
• ETFs have 2 layers of liquidity
– Secondary liquidity (on-screen liquidity)
– Primary liquidity (creation and redemption
process)
Secondary
Liquidity
Primary Liquidity
Page 15
Other Considerations
• Currency risk
– When the ETF currency differs from the local currency, investors will be exposed to currency risk.
– To mitigate this risk, investors can consider using currency hedged ETFs.
• Taxes
– Depending on where your ETF is domiciled, there are different tax implications.
• Execution risk
– ETFs may be mispriced when the ETF market and the underlying securities market are open at different
times.
– It is better to trade international ETFs at times when their underlying securities market is open.
Page 16
ETF Focus List
Page 17
What Is The ETF Focus List?
• Specially curated list of ETFs across 6 categories:
– Core Equity, Core Fixed Income, Regional Equity, Country Equity, Sector Equity and Commodities.
• Serves as a starting point for new investors, guiding them through the vast number of ETFs
available.
• Source of ideas for the more experienced investors, and can even be used to build an
entire portfolio made out of ETFs.
Page 18
Investment Strategies Using ETFs
Page 19
Express A Sector View
• All major sectors and most industry groups
have an index that tracks it.
• ETFs are a convenient tool to increase
sector exposure with a single transaction.
• The use of sector ETFs minimises company
specific risk and helps investors diversify
their portfolio.
• Best used when the overall sector outlook
is positive.
Sector Industry Group
Energy Energy
Materials Materials
Industrials Capital Goods, Commercial & Professional
Services
Transportation
Consumer Discretionary Automobiles & Components
Consumer Durables & Apparel
Consumer Services
Media
Retailing
Consumer Staples Food & Staples Retailing
Food, Beverage & Tobacco
Household & Personal Products
Healthcare Equipment & Services
Pharma, Biotech & Life Sciences
Financials Banks
Diversified Financials
Insurance
Information Technology Software & Services
Technology Hardware
Semiconductors
Telecommunication Services Telecommunication Services
Utilities Utilities
Real Estate Real Estate
Page 20
Core-Supplementary Portfolio Approach
• Core Portfolio
– Invested in broader regions such as US, Europe and Asia ex-Japan, providing diversified exposure to global
markets.
– Assets here are held for the long-term and forms the foundation around which the entire portfolio is built.
• Supplementary Portfolio:
– Invested into specific areas of the markets, where there is an opportunity to earn above average returns.
– Flexibility to make tactical allocations to specific sectors, countries or even investment styles which the
investor is positive about.
– Has to be closely monitored for changes.
– Supplementary portfolio should be capped at 20% to ensure that the overall portfolio does not become
overly aggressive.
Page 21
Sample ETF Portfolio
Page 22
Sample Core-Supplementary Portfolio
• Core-supplementary weightings
– Supplementary portfolio should be capped at
20%
• Asset allocation
– Determined by your individual risk tolerance
– Equities vs fixed income
• Intra-asset allocation
– Equities: sectors, investment styles
– Fixed income: investment grade, high yield,
short duration bonds
• Geographical allocation
– Lower correlation between markets should lead
to lower portfolio volatility.
– Plenty of opportunities beyond the local ETF
market. (E.g. NYSE, HKEX)
Core Portfolio Weight (%)
iShares Core MSCI Asia ex Japan ETF 20
Vanguard FTSE Europe ETF 10
iShares Core S&P 500 ETF 10
iShares MSCI Japan ETF 5
Nikko AM SGD Corporate Bond ETF 15
Vanguard Total International Bond ETF 15
iShares Core US Aggregate Bond ETF 10
iShares JP Morgan EMB ETF 5
Subtotal 90
Supplementary Portfolio
BMO Hongkong Banks ETF 5
Invesco China Technology ETF 5
Subtotal 10
Page 23
Thank You
Page 24
Disclaimer
All material and content are strictly for informational purposes only and should not be considered as an offer, or solicitation, to deal in any of the funds or products found in this presentation. While iFAST Financial Pte Ltd ("IFPL") has tried to provide accurate and timely information, there may be inadvertent delays, omissions, technical or factual inaccuracies and typographical errors. Any opinion or estimate contained in this presentation is made on a general basis and neither IFPL nor any of its servants or agents have given any consideration to nor have they or any of them made any investigation of the investment objective, financial situation or particular need of any user or reader, any specific person or group of persons. You should consider carefully if the products you are going to purchase are suitable for your investment objective, investment experience, risk tolerance and other personal circumstances. If you are uncertain about the suitability of the investment product, please seek advice from a financial adviser, before making a decision to purchase the investment product. Past performance is not indicative of future performance. The value of the unit trusts and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice. Please read our full disclaimer in the website.