SGX Market Updates

STI Dollar Cost Averaging since June 2013 Delivered 6.4% p.a.


24 October 2017

  • RSS Plans provide an alternative means for investors to build gradual STI exposure and make use of dollar cost averaging. From 30 June 2013 to 23 October 2017, the indicative return rate of an RSS Plan on a STI ETF came to 6.4% p.a. excluding transaction fees.

  • RSS plans utilise dollar cost averaging. Over the 52 month period, dollar cost averaging on the STI ETF meant that one third more units were bought at month-end lows in January 2016, compared to month-end highs in April 2015.

  • Providers of RSS Plans on the STI ETF include Phillip Capital, POSB, OCBC Bank and Maybank Kim Eng. The plans are available both on the STI ETFs and certain SGX-listed stocks.

Two popular methods of investing the STI, in is index form, are Exchange Traded Funds (ETFs) and Regular Shares Savings Plans (RSS Plans).  The first Straits Times Index (STI) ETF listed 15 and a half years ago in April 2002, which has since generated a 209% total return from inception through to 20 October. RSS Plans provide an alternative means for investors to build gradual STI exposure, and make use of dollar cost averaging with performance measured by return rates.

There are four RSS Plan providers in the Singapore market. They are Phillip Capital (launched in February 2002), POSB, OCBC Bank and Maybank Kim Eng (most recent to launch in early 2015). All four providers provide access to investing in the STI ETF and Singapore blue chip stocks from just S$100 a month.

The five year history of the STI is illustrated below. The two annotations overlay the month-end price of the Nikko AM STI ETF for June 2013 at S$3.21, and yesterday’s price of this ETF at S$3.48. During that period the month-end ETF prices rose to as high as S$3.57 for April 2015 to as low as S$2.68 for January 2016. 

Five Year Price History of the STI

Source: SGX, Bloomberg

Dollar Cost Averaging

Dollar cost averaging commits a fixed amount of dollars to invest each month, rather than shares/units. This effectively means that the Investor would have purchased more units at market lows and less units at market highs. For instance, applying month-end STI ETF prices, and a fixed amount of S$1,000 every month, the Investor would have purchased 373 units of the STI ETF in January 2016 when the units were priced at S$2.68.

Conversely, when the STI ETF units were priced at S$3.57 in April 2015, the Investor would have purchased 280 units. This means that the investor purchased one-third more units in January 2016, near market lows, than in September 2015, near market highs. The chart below illustrates units that would have been purchased on a RSS Plan on the STI ETF since June 2013, assuming S$1,000 monthly deposits and month-end STI ETF prices. Note the plans by OCBC Bank and POSB commenced in mid-2013.

Source: SGX, Bloomberg (Units purchased & STI ETF prices based on theoretical prices of Nikko AM STI ETF)
Note this dollar cost averaging example and discussions on return rates below is for educative purposes only and does include transaction fees.

Internal Rate of Return 

Like a mortgage, investments are spread over time with dollar cost averaging, hence the traditional measure of Return on Investment (ROI) is less relevant for the RSS Plans. For instance, applying 52 months of S$1,000 investments on the STI ETF would have generated an ROI of S$7,802.34, which represents 15.0% (or 3.3% p.a.) on the summed monthly investments of S$52,000. This is based on monthly transactions of S$1,000 spanning June 2013 through to September 2017 at month-end prices, valued at yesterday’s closing price of the STI ETF, and excludes transaction fees.

However, S$52,000 is not the relevant base for computing returns. The base started with S$1,000 and has been variable albeit consistently grown by S$1,000 each month. Investing logic means that it would be much easier to make S$7,802.34, starting with S$52,000 back in mid-2013, than it would be to make S$7,802.34 starting with S$1,000 in mid-2013.  Hence for RSS Plans, a different return measure known as the Internal Rate of Return (IRR) can be used in place of the aforementioned simple ROI.

IRR simply compares the equal monthly instalments to the current value of the portfolio and computes an annualised return that would have been necessary to achieve the current portfolio value. Hence based on equal monthly payments of S$1,000 over the past 52 months, and the current portfolio value, the RSS Plan on the STI ETF would have had to achieve a 6.4% annualised return. Hence this is a return rate, in addition to a indicative return because the portfolio value is based on month-end STI ETF prices.

Indicative Returns of STI ETF RSS Plan Since June 2013

Initial Investment  Total Investment Portfolio Value Difference Internal Rate of Return (IRR)
S$1,000 S$52,000 S$59,802.34 S$7,802.34 6.4% p.a.

Source: SGX My Gateway, note returns based on STI ETF value of S$3.48 on 23 October 2017.
Note table based on month-end investments with exception of October 2017. Note the S$7,802.34 incremental value includes semi-annual dividend distributions.
Note the Theoretical returns do not include Transaction Fees as the analysis is for educational purposes only. 

This 6.4% p.a. return is almost twice the annualised return of 3.3% which would have been achieved if the investor did not dollar cost average, rather invested with full funds in June 2013. The return is also based on the 23 October 2017 price of S$3.48 for the STI ETF. Had the STI ETF closed at S$3.00, the IRR would have been a decline of 0.1% p.a. and had the STI ETF been at S$3.60, the IRR would have been 7.8% p.a. Hence, market risk is still an inherent part of an RSS Plan, albeit less than lump-sum investing due to the dollar cost averaging.

This article is provided by SGX My Gateway.

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