You will compare three ETFs against your goal and choose one, with written reasons.
Nadia had three funds written down from lesson 5.3 and a feeling that one of them was right. She also had a feeling, the next morning, that a different one was right. Feelings like that are why this exercise exists.
You'll put three ETFs side by side, cross out any that fail your must-haves, and choose the one that does the job at the lowest cost. Then you'll write down why, so the decision survives your next wobble. It takes about 30 minutes. The three funds in Nadia's example, and all their figures, are made up, so use real funds and real factsheets for your own table.
Make a table with a column for each fund and seven rows: index, yearly cost, fund size, spread, listing, currency and dividend policy. You've met every one of these in module 4. Fill each cell from the fund's latest factsheet, and measure the spread yourself during market hours, the way lesson 4.2, How an ETF price is set on the exchange, showed you.
Nadia's three made-up funds look like this.
Fund X tracks a world index of developed and emerging markets. It costs 0.20% a year, holds S$1.2 billion, and its spread was about 0.1% when she checked. It's listed on SGX, she can trade it in SGD, and it pays dividends twice a year.
Fund Y tracks a world index of developed markets only. It costs 0.45% a year, holds S$90 million, and its spread was about 0.6%. It's listed on SGX, trades in SGD, and pays dividends twice a year.
Fund Z tracks a world index of developed and emerging markets too, for just 0.07% a year, and it's very large. The catch is where it lives: listed in the US, traded in US dollars, with dividends four times a year.
Go back to the must-have features you wrote at the end of lesson 5.1. Check each fund against each feature. If a fund fails even one, cross it out, however good it looks on the other rows.
Nadia's list said: shares in many countries, a low yearly cost compared with similar funds, listed on SGX and traded in SGD, and plain, with nothing leveraged, inverse or themed.
Fund Z is the cheapest by far, and it's tempting. But it's listed in the US and trades in US dollars, so it fails her SGX requirement. It would also sit in custody rather than in her CDP account, and bring in the withholding tax and estate questions lesson 5.3 set aside, so out it goes. This is the job the list does. Without it, she'd have argued herself into the cheapest fund and only later found out what came with it.
Funds X and Y both pass.
Among the funds still standing, pick the one that meets your needs at the lowest total cost. Total cost means the yearly fee plus the cost of the spread each time you buy.
Here's a rough way to estimate it for your first year, using Nadia's plan of S$5,000 to start and S$500 a month. She'll buy S$11,000 in total over the year. Leave market moves out of it and her balance averages roughly S$8,000.
For Fund X, the yearly fee is 0.20% of S$8,000, which is S$16. Each time she buys, she pays about half the spread above the midpoint, so 0.05% of S$11,000, or S$5.50. That's about S$21.50 for the year.
For Fund Y, the fee is 0.45% of S$8,000, which is S$36. Half the spread is 0.3%, and 0.3% of S$11,000 is S$33. That's about S$69 for the year.
Commission is the same whichever fund she buys, so she leaves it out. Fund X costs roughly a third as much in year one, and the gap widens as her balance grows. Add its size, which makes closure less likely, and its emerging markets coverage, and it wins every row she cares about.
If your two finalists come out close, choose the larger one, or the one with the longer track record of staying near its index.
Write down the fund you chose and two sentences saying why. The first should tie it to your goal. The second should say why it beat the others.
Nadia writes: "I chose Fund X because it holds companies across developed and emerging markets, trades on SGX in SGD and fits my 20-year goal. It costs less than Fund Y in fees and spread and is much larger, and Fund Z was cheaper but failed my SGX listing requirement."
This is the sentence you'll read when doubts arrive: when a friend mentions a fund that did better last year, or when an ad suggests something shinier. If the reasons still hold, the choice still holds.
A finished shortlist has three funds in columns, seven filled rows taken from current factsheets, a line through any fund that failed a must-have with the reason beside it, a rough first-year cost for the funds left, and your chosen fund with its two-sentence reason, all on one page.
Use the three funds you found at the end of lesson 5.3 and work through the four steps with your own goal and figures.
Complete your shortlist table for three ETFs and write the one you chose and the two-sentence reason.
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