Singapore Exchange

Fundaments of ETFs

SGX Academy Speaker – Puah Soon Lim, CFA

15 August 2015

2

Disclaimer

This document is (a) intended for general circulation in Singapore and (b) not intended for general circulation outside of Singapore. This document does not constitute an offer or solicitation to buy or sell any investment product(s). It does not take into account the specific investment objectives, financial situation or particular needs of any person. Investors should seek advice from a financial adviser before investing in any investment products or adopting any investment strategies. In the event that the investor chooses not to seek advice from a financial adviser, he/she should consider whether the product in question is suitable for him/her. The investment product(s) discussed herein are subject to significant investment risks, including the possible loss of the principal amount invested. Any examples provided are for illustrative purposes only. Past performance of investment products is not necessarily a guide to future performance. SGX and its affiliates may deal in investment products in the usual course of their business, and may at any given time be on the opposite side of trades by investors and market participants. Any statements or information expressed by other organisations are of the respective authors. SGX and its affiliates make no warranty as to the accuracy, completeness, merchantability or fitness for any purpose, of the information contained in this document or as to the results obtained by any person from the use of any information or investment product(s) mentioned in this document. SGX undertakes no responsibility to update this document. SGX reserves the right to make changes to this document from time to time. In no event shall this document, its contents, or any change, omission or error in this document form the basis for any claim, demand or cause of action against SGX and/or any of its affiliates and SGX and/or its affiliates expressly disclaim liability for the same. In the event that the circulation of this document constitutes provision of financial advisory services, please note that SGX is an exempt financial adviser under the Singapore Financial Advisers Act (“FAA”) and is exempt from certain provisions of the FAA, when providing financial advisory services or making recommendations to accredited and/or expert investors, and overseas investors, as provided for under Regulation 34, 35 and 36 of the Singapore Financial Advisers (Amendment) Regulations 2005. This document is being made available to only certain qualified recipients outside Singapore. In the event that this document or any part thereof is recirculated, transmitted or otherwise distributed in any format to any other person by a recipient, such recipient will have the full responsibility to ensure that such recirculation, transmission or distribution complies with all applicable laws, rules, regulations and directives in all the relevant jurisdictions. SGX and its affiliates hereby disclaim all responsibility and liability arising in connection with such recirculation, transmission or distribution.

© SGX

Welcome to SGX 3

“Let me add a few thoughts about your own investments. Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) delivered by the great majority of investment professionals.”

Berkshire Hathaway Shareholder Letter, 1996

Exchange Traded Funds

What is an Exchange Traded Fund? Are ETFs suitable for everyone? What to watch out for – what can cause me to lose money? Key questions to ask or considerations before buying an ETF

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 20150

500

1000

1500

2000

2500

3000

3500

Global ETF Asset Growth

5

$3 trillion and growing

Source: Bloomberg, as at 30 April 2015

CAGR = 29.18%

What is an ETF?

Welcome to SGX 7

An ETF is

…like a Unit Trust

It’s Structured

It’s managed

It’s regulated

Welcome to SGX 8

An ETF is

A Unit Trust with a twist

Exchange

Traded

Listed on an (like a stock)

Intraday(like a stock)

What is an ETF? Two great investment ideas brought together

ETFs

DiversifiedTradable during the

day

Diversified funds that trade

like stocks

Unit TrustStock

26

ETFs are like stocks but they differ in some important ways

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ETFs ≠ Stocks

26

ETFs are like Unit Trusts but they differ in some important ways

Welcome to SGX 13

It is like a Unit Trust but…

$80,000

12

6

39

Unit Trust ETF

12

6

9 3

End of Day NAV Indicative Real Time NAV

Delayed Execution Instant Execution

Welcome to SGX 14

Unit Trust Benchmark Against An Index

Unit TrustBenchmark

Welcome to SGX 15

Unit Trust Benchmark Against An Index

Unit TrustBenchmark

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Source: S&P SPIVA Scorecard 2012, “S&P Indices Versus Active Funds (SPIVA) Scorecard”, S&P Research, 2012 at http://www.spindices.com/documents/spiva/spiva-us-year-end-2012.pdf.

Average Investors Vs Markets

Welcome to SGX 18

ETFs Track The Index

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How does an ETF track an index?

Full replicationInvesting all or substantially all of its assets in the constituentsof the underlying index, broadly in proportion to the respectiveweightings of the constituents in the index.

Sampling approachBy stratifying or dividing an index into manageable risk elementsor buckets to replicate the underlying index performance.

Optimisation approachBy investing in a portfolio featuring high correlation to the indexto minimise index tracking error.

Synthetic replicationThrough the use of financial derivatives or embeddedfinancial derivatives to replicate the index performance

Four Methods of Tracking:

Invest in physical

securities

Welcome to SGX 20

Passively Managed

Lower Fees and Charges

ETFs allow investors to gain exposure to asset classes at lower cost

No Sales

ChargeLow

Management Fees

Intra-day Pricing

Costs Matter

What is the return?

C A P T LI A

SNI

G

SDNEDIV

D

Why do people invest in ETFs?

• Efficiency• Transparency• Flexibility

Why do people invest in ETFs?

• Gain exposure to major asset class without the need to do security selection

• Instant diversification• Pays no sale charge• Low transaction fee

Efficiency

Why do people invest in ETFs?

• Daily information about underlying stocks• Real-time intraday pricing

Transparency

Why do people invest in ETFs?

• Traded like a share• Applicable to a wide range of strategy

Flexibility

SGX The Asian Gateway

Why do people invest in ETFs?

Are ETFs suitable for everyone?

M A Y N O T EB

Risk: What to watch out for?

• Market risk• Tracking error• Foreign exchange risk• Liquidity risk• Default Risk or Counterparty Risk• Market Price not reflecting NAV

Practical uses of ETFs

Core satellite

Portfolio construction/ Diversification

Interim beta/ Transition management

Cash equitisation

Delta 1 alternative

Risk management

Portfolio construction/Diversification

Sectors and exotic markets

Implementing Core / Satellite Strategies

Active Strategy 2

Active Strategy 3 Active Strategy 1

ETFs

Implementing Core / Satellite Strategies

ETF Satellite

ETF SatelliteETF

Satellite

Portfolio

Strategic and tactical

• Strategic Model Portfolio

USA

Japan

Switzerland

Hong KongTaiwan

Malaysia

Israel

China

ColombiaEgypt

ChileBrazilIndia

Korea

Czech Republic

Russia

Thailand

Thematic Model Portfolio

Tactical Model Portfolio

Add short-term

views

Express thematic

views

For illustration purposes only. 

Global Equity

Appendix

• List of ETFs listed on SGX

36

SGX ETFs offer a wide range of investment exposure87 ETFs covering the widest range of asset classes – Equity, Fixed income, Money market and Commodities

Single country:• Singapore• Malaysia • China• India• Japan• Korea• Philippines • Indonesia

Region:• ASEAN• Asia ex-Japan• Pacific• Emerging Market• Europe• Eastern Europe• Latin America• MSCI World

Style:• Short • Dividend

• Brazil• Taiwan• Thailand• US• Vietnam• Australia• Bangladesh• Pakistan

ASEAN

6 COMMODITY BASED ETFs6 MONEY MARKET ETFs10 FIXED INCOME ETFs

65 EQUITY BASED ETFs

Asian Sectors:• Consumer

Staples• Financials• Materials• IT•

Infrastructure• Real Estate

ASEAN

EMERGING MARKETS

EUROPE

LATIN AMERICA

• Thailand

• Brazil

• China

• India

• Indonesia

• Japan• Korea

• Malaysia

• Russia

Taiwan•

• USA

• Vietnam

Singapore •

Australia •

• Philippines

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Multi-asset classes• Only Asian platform with the widest range of non-equity ETFs

Commodity Fixed Income Money Markets

6 COMMODITY ETFs on:

Broad Indices

• RJ/CRB Commodity Index

• RJ/CRB Commodity Non Energy Index

• DBLCI-OY Balanced USD Index

• DB Commodity Booster DJ-UBSCSI

• DB Commodity Booster Light Energy Benchmark ETF

Precious Metal• Gold

10 FIXED INCOME ETFs on:

• JP Morgan USD Asian Credit Bond Index

• Barclays USD Asian Local Currency 1-3 Year Bond Index

• Barclays USD Asian Local Currency Bond Index

• Barclays USD High Yield Credit Bond Idex

•iBoxx ABF Singapore Bond Index

• iBoxx ABF Korean Government Bond Index

• iBoxx € Sovereigns Eurozone TRN Index

• iBoxx $ Treasuries TRN Index

• USD IG Inflation Linked Sovereign

• Australia SSA Bond UCITS ETF

6 MONEY MARKET ETFs on:

• US Dollar Money Market – Fed Fund Effective Rate Total Return Index

• EONIA Total Return Index

• AUD Money Market (in AUD, USD & SGD)

• SORA Total Return Index

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Fixed Income

• ABF Singapore Bond Index Fund

• iShares Barclays Capital USD Asia High Yield Bond Index ETF

• iShares J.P Morgan USD Asia Credit Bond Index ETF

Country & Regi

on Equit

y

• db x-trackers FTSE China 50 UCITS

• db x-trackers MSCI Brazil Index UCITS

• db x-trackers MSCI China Index UCITS

• db x-trackers MSCI Korea UCITS

• db x-trackers MSCI Malaysia Index UCITS

• db x-trackers MSCI Philippines IM Index UCITS

• db x-trackers MSCI Singapore IM Index UCITS

• db x-trackers MSCI Taiwan Index UCITS

• db x-trackers MSCI Thailand Index UCITS

• iShares MSCI India index ETF

• Nikko AM Singapore STI ETF

• SPDR Straits Times Index ETD

• CIMB FTSE ASEAN 40 ETF

• CIMB S&P Ethical Asia Pacific Dividend ETF

• db x-trackers MSCI Pacific Ex Japan Index UCITS

Commodit

y

• SPDR Gold Shares

19 EIP ETFs

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Regional Coverage of 12 Asian-focused EIP ETFsTwelve of the 19 ETFs

Total Return of 24.6% over 3 years

Source: SGX Mygateway

40

Choice ETF Platform in Asia for Market Access

International listing and trading platform in Asia– 3rd largest market share of 21% on turnover of

non-domestic ETFs in Asia – 87 ETFs on an efficient platform allowing asset

allocation or just market access via one platform

Mix of international and regional retail investors– Predominantly institutional investors with good

growth momentum in retail segment– STI ETFs offered under Regular Shares Savings

Plan by POSB, Phillip Securities and OCBC

Presence of Designated Market Makers to provide on-screen liquidity

– Average spread of 30-50 bps with decent size– Flexibility of executing large orders via married

trades

Facts

Daily Traded Value: S$10m

Total no. of listed ETFs: 87

Total AUM: US$3.5 billion

Top 5 ETFs by turnover

• iShares MSCI India ETF

• SPDR Gold Shares

• DBXT MSCI AC Asian Ex Japan Index UCITS ETF

• DBXT MSCI Indonesia Index UCITS ETF

• SDPR Straits Times Index ETF

Daily summary of the trading volume and last sale price of the 19 EIP ETFs on

Straits Time Business section.

Welcome to SGX 41

Welcome to SGX 42

Welcome to SGX 43

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While SGX and its affiliates have taken reasonable care to ensure the accuracy and completeness of the information provided in this presentation, they will not be liable for any loss or damage of any kind (whether direct, indirect or consequential losses or other economic loss of any kind) suffered due to any omission, error, inaccuracy, incompleteness, or otherwise, any reliance on such information. Neither SGX nor any of its affiliates shall be liable for the content of information provided by or quoted from third parties. Examples provided are for illustrative purposes only. The information in this presentation is subject to change without notice.

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Welcome to SGX 44

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