Compare ETFs that track the same index by cost, size and where they are listed.
Pull up the factsheets for two or three ETFs that follow the kind of index you picked in lesson 5.2. On each one, find three lines: what the fund costs each year, how big it is, and which exchange it trades on. When several funds track the same kind of index, those three lines settle most of the choice. All three are on the factsheet you worked through in lesson 4.4, "Read one ETF factsheet and find six facts", and you don't have to forecast anything to use them.
Nadia ran into this problem with her first ETF. She had decided on a world index and thought the difficult part was done. Then a search turned up several ETFs that follow world indexes. A few were on SGX and others were listed overseas. They came from different issuers, with different fees and different sizes, and most of them held the same companies. She had no way of telling which one to choose.
Each year a fund pays its running costs out of the money it holds. On the factsheet this charge appears as the expense ratio, or sometimes as ongoing charges. It comes out inside the fund and you never receive a bill for it, so a fraction of a percent is easy to ignore. Over several decades it becomes a real sum. The fee comes off a balance that keeps growing, year after year, and every dollar taken out no longer compounds for you.
Nadia's plan shows how large the gap can get. She puts in S$5,000 at the start (an example figure) and then S$500 a month for 20 years. She assumes a return of 5% a year before costs, which is an assumption and predicts nothing. Her contributions total S$125,000, worked out as S$5,000 plus S$500 x 240 months. If her fund charges 0.2% a year, she finishes with about S$211,000. If it charges 0.6% a year for the same holdings, she finishes with about S$202,000. Worked out before rounding, the difference is roughly S$9,400, and the fee is the only thing that differs between the two results.
So when two funds own largely the same things, the cheaper one starts ahead, and the other has a hard time making up that difference. The expense ratio does not include every cost. The fund's own trading costs and the tax taken from its dividends also reduce what you earn. Lesson 3.1, "Expense ratio and the costs it leaves out", in the course "Build and run an ETF portfolio", teaches you to compare what funds actually delivered beyond the expense ratio. When you're choosing a first fund, putting the expense ratios of similar funds side by side is enough.
Fund size is the total value of everything the fund holds. You check it for two reasons: whether the fund might close, and how much you pay to trade it. Lesson 4.3, "What can go wrong with an ETF", explained that issuers sometimes close funds that fail to attract enough money. If your fund closes, you receive cash and have to begin again. A large fund earns its issuer enough to be worth keeping, so it is less likely to close.
Bigger funds also tend to trade more often, and funds with more trading usually have narrower bid-ask spreads. You learned to measure spreads in lesson 4.2, "How an ETF price is set on the exchange". A fund that is far smaller than its competitors may cost you more each time you buy, even if its expense ratio looks low.
No fund size counts as safe in itself, so judge the funds against one another. If one fund holds many times the assets of another fund on a similar index, count that as a point in its favour. Be careful with a very small fund that has been running for years and never grown.
One index can be tracked by a fund on SGX and also by funds listed abroad, for example in the US or London. The listing affects more than when you can trade. A fund on SGX trades while the Singapore market is open. Many SGX funds have an SGD counter, a trading line priced in Singapore dollars, so you can buy them without changing money into another currency. If the broker you chose in lesson 1.4 is linked to CDP, an SGX fund can be held in your own CDP account. For a first fund, SGX is the simplest route.
An overseas listing has several issues you need to work through first. Your broker has to offer that market, and your units will usually be held in custody. You'll need to convert currency, which comes with its own costs. Depending on where the fund is domiciled, you may lose part of the dividends to withholding tax. A fund listed in the US can also leave your family with a US estate tax issue. None of this rules out an overseas fund, but you have to work through each point before you buy, and this course does not cover them. Begin with lesson 3.1, "Why 30% of a US dividend never reaches you", in the course "Investing in US and global markets from Singapore". Lesson 4.1, "The US can tax your US shares when you die", in the same course, deals with US estate tax. Lesson 3.3, "Domicile and withholding tax on dividends", in the course "Build and run an ETF portfolio", covers withholding tax and domicile.
A fund's domicile is the place where it is legally based, and that can be somewhere other than where it is listed. A fund listed on SGX is not necessarily domiciled in Singapore, so read the domicile line on the factsheet whichever listing you choose.
Often all three checks point the same way. Big funds tend to cost less because the issuer can spread its costs, and they also tend to trade with tighter spreads. When the checks point different ways, go back to the must-have list you made in lesson 5.1, "Start from the goal, not from the fund", and check each fund against it. A fund that misses any must-have is out. If your list requires an SGX listing in SGD, an overseas fund is out however low its fee is. Nadia's list asked for SGX and SGD, which kept her search short.
Using the index type you chose in lesson 5.2, find three ETFs that fit it and record each one's yearly cost, fund size and listing.
Find three ETFs for the index type you picked and write down each one's cost, size and listing.
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