SGX Market Updates

How Cautious Optimism Became a Popular STI Investing Strategy

SGX
Publish date: Mon, 20 Jan 2025, 06:39 PM
  • A cautiously optimistic economic outlook for 2025 projects stable growth and moderating inflation for Singapore, despite global uncertainties such as geopolitical and trade tensions, potential economic slowdown in China, and persistent services inflation in advanced economies. 
     
  • Consensus views suggest cautiously optimistic investors maintain a hopeful outlook while being aware of potential risks, emphasising risk management, focusing on long-term goals, sticking to a disciplined investment plan despite market volatility, and diversifying across various assets to mitigate risk.
     
  • This familiar outlook has seen Dollar-Cost Averaging (DCA) become a popular investing strategy, supported by modern platforms that offer ways to gradually build exposure in ETFs and stocks. From 2019 to 2024, the indicative CAGR of a monthly STI ETF DCA was 6.2%, compared to lump-sum investing with a 7.2% annualised total return.
     
  • On 22 Jan, the SGX Academy will host an online event - Investing Simplified: A Beginner’s Guide to Regular Savings Plan, that aims to educate beginners on the fundamentals of DCA through regular savings plans, and how to start investing systematically – click here to RSVP. 
     

STI ETFs 

The Straits Times Index (STI) represents the 30 largest stocks by market value listed in Singapore that also rank among the more actively traded. Reflecting multiple strengths of the Singapore economy, as an Index, the STI  maintains significant representation of financial services, communications, manufacturing and real estate, in addition to significant regional revenue reach.

At the end of 2019, the SPDR STI ETF ended the month at S$3.277 per unit. Five years later, this ETF ended 2024 at S$3.850 per unit. This was a 17.5% gain in unit prices, however reinvesting dividends would have boosted the total return to 41.8% or 7.2% annualised, excluding transaction fees.

During the five-year period, the combined AUM of the two ETFs that track the STI crossed over the S$2.0 billion threshold and then crossed the S$2.5 billion threshold in Nov 2024, the latter coinciding with the STI staging its most significant charge towards its all-time high in 17 years.

 

From Cliché to Strategy: The Growing Popularity of Dollar-Cost Averaging in Singapore

A cautiously optimistic outlook for 2025 suggests stable growth and moderating inflation for Singapore, despite global uncertainties such as geopolitical and trade tensions, China's projected economic slowdown, and persistent services inflation in advanced economies. In the world of investing, cautious optimism is such a familiar outlook that it has almost become a cliché.

For investors who maintain such a stance and who do not have the time to monitor the markets daily, a systematic approach to investing can be a practical solution. This method can involve deploying a standardised amount of capital consistently on a specific day each month, which helps build exposure near the average price of a stock or ETF over time. This strategy, known as Dollar-Cost Averaging (DCA), allows investors to buy fewer units when prices are high and more units when prices are low, thus mitigating some of the timing risks that concern investors.

Online searches on DCA reveal a consensus that the rise of modern investment platforms and apps has made it much easier for investors to adopt DCA strategies, with these platforms providing a range of features, including fractional shares and low-cost trading, which facilitate the efficient implementation of DCA. In Singapore, the emphasis on DCA by the SGX Academy and the introduction of more Regular Shares Savings (RSS) Plans by local brokers over the past decade have contributed to the growing popularity of this systematic investment strategy.

 

The Concept of Dollar-Cost Averaging

DCA is an investment strategy where an investor divides the total amount to be invested across periodic purchases of the same asset. The primary benefit of DCA is that it reduces the impact of volatility on the overall purchase. By spreading out the purchases, the investor buys more shares or units when prices are low and fewer shares when prices are high, thus averaging out the cost per share over time.

For example, consider a DCA on a monthly approach. If an index ETF is trading near S$4.00 per unit, an investment of S$1,000 would buy 250 units for that month. However, if the price falls to S$2.00, the same S$1,000 would buy 500 units, whereas a gain to S$10.00 would see just 100 units bought with the same S$1,000. This approach sees the investor accumulate more units when prices are lower, potentially leading to higher returns if the market recovers. This also mitigates some of the market risk that comes with lump-sum investing. Morgan Stanley also maintain that DCA helps to lower the initial timing risk, for investors who want to minimise potential short-term losses and avoid the regret of poor timing decisions. The systematic nature of DCA can also assist investors in staying disciplined and avoid overtrading market movements. However, the trade-offs from not pursuing a lump-sum investment include a lower potential return, and a lengthier time to accumulate the position.

Case Study: SPDR STI ETF over 60 months from Dec 2019 to Dec 2024

Implementing Dollar-Cost Averaging

To illustrate how DCA works in practice, let's break down the three key steps:

  1. Determine the investment amount: Decide on a fixed amount to invest each month. For this example, we'll use S$1,000.
  2. Determine the stock or ETF: In this case we will use one of the two ETFs that track the STI - the SPDR STI ETF as an example. The other STI-focused ETF which is also popular with DCA investors is the Nikko AM STI ETF.
  3. Set a regular investment schedule: Choose a specific day each month to make the investment. Consistency is key. In this case we’ll use the last trading day of the month and the last closing price for that trading day. 
     

Noting this is an educative example excluding transaction fees, here's how the indicative S$1,000 monthly investment would have looked over a few months:

  • Dec 2019: ETF price = S$3.277, units bought = 305
  • Jan 2020: ETF price = S$3.205, units bought = 312
  • Feb 2020: Dividend distribution of S$0.056 paid on 617 units & ETF price = S$3.020, units bought = 331
  • Mar 2020: ETF price = S$2.485, units bought = 402 (increased to 416 units with Feb 2020 dividend reinvested)
  • Apr 2020: ETF price = S$2.635, units bought = 380
  • May 2020: ETF price = S$2.553, units bought = 391
     

Over the full five months spanning end of Dec 2019 to end of May 2020, investors systematically put S$6,000 to work to acquire 2,121 units at an average price of S$2.863 per unit. Note that in Feb 2020 a dividend distribution of S$0.056 per unit would have been paid on the 305 units and 312 units acquired at the end of Dec 2019 and Jan 2020. Assuming the dividend was reinvested into units at the end of Mar 2020, the S$34.55, with S$0.93 of unutilised funds from the previous month, would be enough to acquire 14 more units at the Mar month-end price of S$2.485.

By the end of May 2020, the investor would have accumulated 2,135 units for a total investment of S$6,000 (or S$5,998 when considering the exact number of units bought). At a price of S$2.553 per unit, the investment would be valued at S$5,451, indicating a loss of 9.1%. While the DCA would have reduced the approximate 21% loss had the investor lump-summed the S$6,000 investment at the end of Dec 2019, the DCA method is still subject to market risk which can see share or unit prices fall below purchase prices due to macroeconomic or sector/company-specific factors. In addition, by holding back a portion of the investment to be deployed over time, investors might miss out on potential gains if the market recovered strongly during the investment period.

Nevertheless, insights from behavioral finance have reinforced the value of DCA by highlighting how it helps investors avoid emotional decision-making and stay committed to their long-term investment goals. While the first five months of this example were highly volatile with the onset of significant COVID-19 containments, the first five months of 2020 did see the DCA acquire around 25% more units each month, than the last five months of 2024.

Maintaining Dollar-Cost Averaging

Assuming this DCA plan is followed over the next 55 months through to the end of 2024, there would have been a total of  S$61,000 deployed. With dividend distributions reinvested into units the month after their distribution, the investor would have acquired 21,440 units. With the SPDR STI ETF price at S$3.85 per unit at the end of December, the 21,400 units would be valued at S$82,544, indicating a basic ROI of 35.3%. The indicative compound annual growth rate (CAGR) is 6.2%. This represents the rate of return required to grow a S$61,000 in an indicative investment to S$82,544 over the five years.

As illustrated below, the semi-annual dividend distributions continued to grow over the five years, which saw the 19,617 units acquired from Dec 2019 through to the end of July 2024 pay S$0.086 per unit in Aug 2024. The S$1,687.06 reinvested into Sep 2024, with the systematic deployment of the monthly S$1,000 and S$1.50 of unutilised funds from the previous month, meant that 738 units could be purchased at the end of Sep 2024, with the unit price at S$3.642.  

  Source: SGX (Data as of 31 Dec 2024)

Singapore’s major Index stocks, known for offering high dividend yields, have a long history of returning capital to investors through dividends. As of December, FTSE Russell reported that the FTSE Singapore maintained the highest dividend yield in the Asia Pacific region, standing at 5.0%, with the STI at 4.9%. This highlights the draw of Singapore’s market for income-focused investors. Further analysis of the FTSE ST Indices, introduced back in January 2008, reveals comparatively high yields are prevalent across most sectors. This broad-based strength in dividend yields underscores the robust dividend-paying culture among Singaporean companies. It also reflects the past stability and profitability of these firms, which have generated sufficient earnings to support regular dividend payments. While the STI is currently trading within 10% of its 3906.16 all-time high, Refinitiv estimates that reinvested dividends have boosted the STI total returns to around 90% since that all-time high was reached in October 2007.

The chart above also clearly illustrates how the DCA on the SPDR STI ETF saw more units purchased when prices were low and fewer units purchased when prices were comparatively higher. For example, at the end of Oct 2020, at S$2.456 per unit, the S$1,000 investment bought 407 units. However, at the end of Dec 2024, when the STI ETF finished the month at S$3.85 per unit, the S$1,000 bought just 260 units of the SPDR STI ETF, more than one-third fewer units than in Oct 2020.

As noted above DCA and ETF investing is also subject to market risk. For instance, using this DCA educative example, had the SPDR STI ETF returned to S$3.00 per unit on 31 Dec 2024, the basic ROI would have been 5.4%, and CAGR would be 1.1%. If the price had plunged to S$2.50 per unit at the end of Dec 2024, the basic ROI would have been -12.1%, and CAGR would be -2.6%.

The comparative CAGR of the DCA on a STI ETF since 31 Dec 2019 could also have been further boosted by investing unutilised funds in SGS Bonds, T-bills and Savings Bonds. Other Singapore-listed ETFs utilised by DCA investors include the Nikko AM STI ETF, ABF Singapore Bond Index ETF, Nikko AM Straits Trading Asia ex Japan REIT ETF, Nikko AM SGD Investment Grade Corporate Bond ETF and the Lion-Phillip S-REIT ETF. For more information on how DCA helps investors manage risk by consistently investing a fixed amount, thus averaging out the cost per share over time and mitigating market volatility, click here.

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