You will be able to describe what the STI holds and the sector concentration a local income portfolio can carry.
Wei Ling's five local holdings felt well spread. There were two banks, a telecoms company and two REITs, all picked one at a time over three years, each for a reason that made sense when she bought it. Then her friend asked a simple question: what happens to her income if Singapore property and Singapore banks have a bad year at the same time? She did not like the answer.
This lesson looks at the index most local income investors start from, and at the concentration that comes with it.
The Straits Times Index, the STI, tracks 30 of the largest companies listed on SGX. FTSE Russell and SGX both publish its rules, its current constituents and a factsheet, which is the source to cite. People often call these companies the Singapore blue chips.
The index is weighted by market value, adjusted for the shares freely available to trade. A bigger company carries more weight, so a handful of the largest companies make up a large part of the index, and the smallest constituents barely move it.
The constituents change from time to time at scheduled reviews, when a company grows large enough to join or shrinks enough to leave. The current list and weights are on the FTSE Russell factsheet for the STI and on the SGX website.
Look at the factsheet and you will see that the index leans heavily on a few sectors. Banks make up a large share on their own. REITs and other property-linked companies, such as developers and companies whose main assets are land and buildings, take up another big slice. Check the current weights on the factsheet, because they move as prices move and as constituents change.
This is not a flaw in the index. It reflects what the Singapore market is: a financial centre with a large banking sector and a well-developed property and REIT market. Many of the biggest companies listed here are in those sectors.
It also explains why the STI is popular with income investors. Banks and REITs are among the larger dividend payers on SGX, so an index heavy in them tends to pay a meaningful yield. Check the current figure on the factsheet rather than relying on one you saw quoted.
Now look at how people actually build local income portfolios. They go looking for good dividend payers on SGX. The large, familiar, well-covered dividend payers are mostly banks, REITs and property-linked companies. So the portfolio fills up with them, one sensible choice at a time.
With made-up figures, here is roughly what Wei Ling had. S$8,000 in one bank and S$6,000 in another, S$4,000 in the telecoms company, and S$4,000 and S$3,000 in two REITs. That is S$25,000 in total. The two banks are S$14,000, or 56%. The two REITs are S$7,000, or 28%. Only S$4,000, 16%, sits outside banks and property.
Banks lend heavily against property, and REITs own property. A downturn in Singapore property, or in the economy that drives it, would hit both groups together. Her five holdings behaved, in practice, more like two.
And for most Singapore investors there is more exposure outside the portfolio. Your salary depends on the Singapore economy. Your home, if you own one, is Singapore property. Your CPF is in Singapore dollars. A local income portfolio that is mostly banks and property adds to that bet rather than spreading it.
An STI ETF holds all 30 constituents at their index weights in one fund. Compared with picking several blue chips yourself, it is simpler: one purchase, one line on your statement, and no need to decide which bank or which REIT. It also removes the risk of any one company's problems hitting you hard, because no single stock is a large share of a small portfolio unless the index itself gives it that weight.
What an STI ETF does not do is fix the sector concentration. It holds the index, and the index is heavy in banks and property. So the choice between an STI ETF and a basket of individual blue chips is about convenience and single-company risk. It does not change how much of your income depends on two sectors in one country. Lesson 8.2, Spread income across sectors, sources and countries, deals with that, and the course Build and run an ETF portfolio covers how an STI fund fits alongside world funds.
Nothing here says whether to hold the STI, an STI ETF or any of its constituents. That depends on your plan. What you need is to know what you are holding.
The factsheet gives the sector breakdown of the index. Your own statement gives what you hold. Put the two side by side and add up the financials and real estate in each.
In the activity you will do that with the current factsheet, and see whether your own local holdings are more or less concentrated than the index they come from.
Download the current STI factsheet and add up the weight of financials and real estate, then compare it with your own local holdings.
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