Index funds such as ETFs and unit trusts tracking the indices have been unpopular. Despite its superior returns compared to its active managed counterpart, not many people know about it. Even if they know, they face a hurdle of obstacles. Despite the large number of ETFs on the Singapore Stock Exchange, few actually buy it. You see, many retail investors treat the stock exchange like a casino which you do not need to pay an entrance fee. ETF is so boring that speculators do not bother about it. On the other hand, long-term investors face another 4 different obstacles. I wrote to the Straits Times on this issue and it was published on 9 July 2014:
THE article ("Shine of gold, bonds, equities rubs off on ETFs"; last Saturday) stated that there are 96 exchange-traded funds (ETFs) listed on the Singapore Exchange.
Despite the large number of ETFs listed here, and studies that show ETFs generally perform better than actively managed funds such as unit trusts, they are not a popular investment choice among Singaporeans.
One reason could be that investors need to first take a financial literacy test, as some of these ETFs are classified as specified investment products ("Striking the right balance on regulations"; Monday).
Also, quite a number of ETFs listed on the Singapore Exchange have poor liquidity. For example, I know of someone who took more than a month to liquidate $100,000 worth of a particular ETF.
Although there is nothing stopping investors from purchasing ETFs with higher liquidity listed outside of Singapore, unfamiliarity with foreign regulations and tax implications remains an obstacle.
Another reason could be that many financial advisers do not offer advice on and recommend ETFs because it is unclear whether Singapore's regulations permit them to do so.
Although an ETF is a collective investment scheme, some financial advisory firms treat ETFs as stock since they are a listed security. Perhaps the authorities can clarify this matter.
Lastly, even if financial advisers are permitted to offer advice and recommendations on ETFs, there is no platform for them to help their clients purchase these products.
The three investment platforms that financial advisers use, namely Aviva's Navigator, iFast Central and Phillip Securities' Fame, do not carry ETFs.
Investment-linked policies from insurance companies are also restricted in the choice of their funds.
Unless these obstacles can be overcome, ETFs will remain an unpopular choice for investment in Singapore.
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MAS replied to my letter on 31 July 2014 in Straits Times:
Investing in exchange-traded funds: MAS replies
MR WILFRED Ling ("Why exchange-traded funds are not popular here"; July 9) commented that many financial advisory firms are unclear about whether they are permitted to offer advice on exchange-traded funds (ETFs).
As he correctly pointed out, ETFs are collective investment schemes. Financial advisory firms should be aware whether they are permitted to offer advice on ETFs, because they need to be authorised by the Monetary Authority of Singapore (MAS) to do so, under the Financial Advisers Act.
The list of retail collective investment schemes authorised by the MAS, including ETFs, is available on our website.
Mr Ling also suggested that the need for investors to take a financial literacy test could be a reason for ETFs being an unpopular investment choice.
Not all investors in ETFs need to take the financial literacy test that is relevant to Specified Investment Products (SIPs).
Investors who are assessed by financial institutions to possess the required investment knowledge and experience to understand more complex products would be able to transact in listed ETFs that are classified as SIPs, without the need to take a test.
Investors also have the option of taking a Singapore Exchange online learning module, and passing a test at the end of the module to demonstrate their understanding of the features and risks of listed SIPs. About 70 per cent of those who have taken the test have passed.
Investors who are deemed not to possess the required investment knowledge and experience after these steps may still transact in ETFs classified as SIPs, if the financial institution puts in place safeguards such as explaining to these investors the general features and risks of ETFs, and providing them with a written statement of the explanation given. These measures are important to safeguard investor interests.
Mr Ling also commented that Navigator, iFast Central and Phillip Securities' Fame, which are used by financial advisers, do not offer ETFs.
While ETFs are not available on these platforms, investors can open a securities account with a broker to trade in such listed products.
Finally, Mr Ling suggested that investment-linked policies from insurance companies are restricted in the choice of their funds. There is no such restriction imposed on the funds that investment-linked policies can offer.
Bey Mui Leng (Ms)
Monetary Authority of Singapore