You will be able to compare four index choices on what they hold and the concentration each brings.
Farhan's colleague Grace holds three funds. She has a world equity ETF because a finance video recommended one, a US index ETF because American tech companies did well, and an STI ETF because her father always said to buy what you know. She thinks she is spread across the world. When she lines up the factsheets, she finds she is mostly in the US, with a large slice of Singapore banks on the side.
This lesson walks through the four index choices most Singapore investors meet, and what each one actually adds to a portfolio.
As lesson 2.1, What an index is and how it decides weights, showed, the word world means different things. A developed world index, such as MSCI World, covers large and mid-sized companies in developed markets. An all-world index, such as MSCI ACWI or FTSE All-World, adds emerging markets on top.
Because both are weighted by market value, they lean towards the biggest markets. The US is by far the largest single country in either one. Check the current US weight on the provider's factsheet, and expect it to be well over half. Japan, the UK and a handful of European markets follow at much smaller weights. Singapore is in there too, at a weight of well under 1% of a world index; check the exact figure on the same factsheet.
For most investors, an all-world index is the closest thing to holding the whole share market in one line. A developed index plus a separate emerging market fund gets you to a similar place in two lines.
A US index, such as the S&P 500, holds large US companies only. It is a popular choice, and US shares have had strong returns over long stretches. The point to understand is that a world index already holds those same companies, at a large weight.
So a US fund added on top raises your US weight further and adds little that is new. With made-up figures, suppose your world fund has 60% in the US, and you put 20% of your share money into a US fund and 80% into the world fund. Your US weight becomes 80% times 60%, plus the full 20%, which is 68%. Grace did this without meaning to.
That can be a deliberate choice. If it is, write down why. If you added a US fund because of recent returns, lesson 2.3 explains why that reason does not hold up.
Emerging market indexes cover countries such as China, India, Taiwan, Brazil and South Africa. Their economies and companies can grow quickly, and their share markets have had long periods of both strong and weak returns.
They also bring more of certain risks. Currencies can swing sharply against the Singapore dollar. Governments can change the rules quickly, sometimes the rules on who may own which companies. And because the index is weighted by market value, a few countries make up most of it, so emerging markets is not as spread out as the name suggests. Look at the country breakdown on the factsheet before you decide how much to hold.
An all-world index already includes emerging markets at their market weight. A separate emerging market fund is only needed if you hold a developed-only world fund, or if you want a different weight from the market's and have written a reason.
The Straits Times Index tracks 30 of the largest companies listed on SGX, according to FTSE Russell, which calculates it, and SGX. It is the index behind the STI ETFs many Singaporeans start with.
Thirty companies is a narrow base. The index leans heavily towards banks and property, including REITs, with the local banks alone making up a large share; check the current sector weights on the FTSE Russell or SGX factsheet. Holding a lot of the STI means betting heavily on a few sectors in one small economy.
There are real reasons people like it: familiar names, dividends, no currency swings for an SGD investor. Module 5 weighs those reasons against the fact that your job, CPF and home are probably tied to Singapore already. For now, think of it as one small regional slice that comes with a strong sector tilt.
Leave last year's returns out of the comparison and look at what each index holds and how concentrated it is: how many companies, which countries carry most of the weight, which sectors dominate, and how much of the index the top ten holdings make up. Those figures sit on each provider's factsheet, which is where your table in the activity comes from.
Grace's table showed her three funds overlapped far more than she expected. Yours may show the same, or it may confirm that what you hold matches what you meant to hold. Either way, you will be choosing from facts rather than fund names.
Compare the country and sector weights of a world, a US, an emerging market and a Singapore index from their official factsheets in one table.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).