Category: Investing

The Singapore Savings Bond is for lack of a better word – legit.

However like most of the good things in life, it gets tossed aside for nicer looking (shinier) but cui products.

WHAT IS THIS SORCERY?

The SSB basically works like this. You put in money (principal) and you get back interest. Sounds simple right? The closest approximation i can get to this SSB is something like a fixed deposit.

WHY ITS GOOD

The core of finance teaches us that the riskier a product is, the more returns you should theoretically be compensated with.

The SSB is backed by the government while fixed deposits are backed by the respective banks. In essence, the SSB is safer than fixed deposits.

Looking at this you would think that the SSB rates should be lower than the fixed deposit rates of the banks right?

Wrong. Currently, the 1 year SSB rate (for the upcoming issue GX17080Z) is at 1.05%. However, DBS fixed deposit rates for 1 year is at 0.35%.

Check:

SSB Rates : 1.05%

DBS Fixed D rates : 0.35%

UOB Fixed D rates: 0.25%

OCBC Fixed D rates: 0.25%

*For the sake of fairness, i have not included in promotional rates that requires you to jump through hoops.

Also, for a fixed deposit if you redeem early, there is a penalty that is incurred. However for the SSB, there is no penalty incurred for early withdrawals.

Our current scorecard:

Returns: SSB wins

Risk: SSB wins again, come on… its an AAA backed bond

Penalty: No penalty whatsoever, interest accrued is paid to you on withdrawal.

My verdict: The SSB beats any fixed deposit plans hands down.

WHAT ABOUT THE BONDS?

For those with a longer term horizon (eg, those looking for 10 years and beyond). SSBs are a huge improvement over their equivalent SGS bonds.

This is as the holder of the SSB has essentially a free option to liquidate. What do i mean?

The structure of the SSB works through a step-up interest ladder. Theoretically, LT rates should be higher than ST rates for a variety of reasons. The buyer of an SGS has to target at time t=0 which time horizon he wants to buy for.

The buyer of a SSB has no such restriction. He can buy and hold for 10 years and get the 10 year SGS yield. Or he can hold for 5 years and get the equivalent 5 year SGS yield.

CAN IT GET BETTER? (YES WE CAN) INTEREST WE CAN BELIEVE IN*

*(if you get the reference)

For bonds, investors make money through 2 ways.

1. Capital gains between the difference in market value of the bond
2. Coupon/”interest” payments

Generally for fixed income products, you want interest rates to fall. This is as when interest rates rises, the market value of the bond falls.

The reasoning behind this is a little bit complicated and out of the scope of this post but if you dont take my word for it, go here.

If you believe that rates are going to rise and you still want to put money in, then the SSB is a god-send. This is because the SSB is capital protected. In a traditional bond or even the SGS, the price of the bond might fall below the price you purchased it at – resulting in a loss. However for the SSB, the amount you put in does not fall is capital protected.

I repeat: It does not fall. What you can do is to take out that principal and reinvest it at the next issue with higher rates.

However, if you believe that interest rates are going to fall, in a traditional bond or SGS, you will get capital gains. For the SSB however, you will not get those gains. However on the flip side, you have managed to lock in higher interest rates still.

In my own uneducated opinion, i think that interest rates are more likely to rise than fall from here. An instrument like the SSB is useful in plugging the gap of investing in fixed income in a rising rate environment.

 

TLDR:

SSB is good because

1. Higher rates than Fixed Deposits even though it is safer (?!!!!)
2. Relatively liquid, i am able to take out my money with 1 month’s notice, almost like a checking account
3. Capital protected even as rates rise

REVIEW:

You think that with such a good product, the SSB would be over-subscribed like mad right. Actually, no. It was massively under-subscribed on inception.

If you are wondering how fixed deposit rates can still be lower than the SSB, here is your answer. Perhaps not enough investors are taking the better option and thus forcing a correction.

Also, for those buying insurance “investment” plans or what not, please check if they can even beat the risk free 2.06% (this month’s issue) for 10 years (Compounded).

 

 

 

 

ETFs 

Simply put, ETFs are one of the best instruments that are available to investors today; especially for retail investors like you and me.

If I were to give an analogy, ETFs are like “cai png” – Cheap and gets the job done whereas your traditional mutual funds are like “restaurants” – Expensive and sometimes cui.

vs

After this article, you will be able to understand the following

• What is an ETF exactly?
• Why is it so good?
• What ETFs are there out there?

We will not be covering portfolio construction in this article as that is too complex and would require a separate article for itself to do justice to it.

WHAT IS AN ETF?

ETFs is an acronym for its rather unsexy and uninspiring name:  Exchange Traded Funds. The name originates perhaps for its unique feature that it is actively traded in the markets, much like a stock.

The analogy I would give for an ETF is that, if you think of stocks as eggs, an ETF is a basket containing the eggs and being sold together in a bundle.

Being actively traded brings about many benefits, namely, efficiency as well as liquidity. Before ETFs came to the forefront, if you wanted to buy a diversified portfolio. You had to go through an arduous process that could span weeks (imagine that). You could either buy the individual stocks yourself or buy a fund.

Purchasing it yourself could be a nightmare and if all you had was a few bucks, then it could prove to be almost impossible. After all, gaining exposure to 500 stocks when all you have is 500 bucks is not an easy task. (I mean… you can’t really buy 0.0001 share of APPL right?)

If you bought a fund, you had no idea about how the fund was doing except when the manager sent you their quarterly or annual reports.

ETFs have transformed that. Now, you can get a rather efficient price for your holdings at almost any time.

WHY ARE THEY SO GOOD?

We have covered some of the benefits of ETFs already above, however there are other benefits as well which makes it one of my favourite instruments.

• Low Fees

Traditional funds charge a huge premium on their management fees, while studies have conclusively shown that most of them don’t even add value. Unit trusts are one of the biggest offenders with their enormous front and back loads (which can be as much as 5%). In the previous article (link) we have already uncovered how high fees can have a drastic impact on your investment performance. The lower the fees, the better. ETFs excel in this aspect with most of them charging fees of less than 0.2%.

• Diversification

You would have also learnt that diversification stabilizes returns and is probably the only free lunch in obtaining risk adjusted returns. ETFs provides a cheap and easy way to obtain such benefits. If you were looking at the small cap US stocks, imagine the tedious amount of effort in going out and buying them in the right proportions.

• Ease of obtaining exposure to illiquid asset classes

While most of us will only be familiar with equities, the truth is; equities is one of the smallest asset classes out there. Other asset classes such as currencies, fixed income (rates and credit), alternatives (commodities) are also essential in the investing journey. Diversification does not stop within the asset class, rather it should encompass your entire portfolio. ETFs allows one to gain exposure to these asset classes at a cost effective and manageable level. Imagine you wanted to invest specifically in property sectors with just $2000, that would have been impossible in the past, but with ETFs it is realizable now.

To summarize, ETFs are low cost, provides inbuilt diversification and allows one to gain exposure to asset classes that one might not have been able before.

 

WHAT OTHER ETFs ARE THERE?

The universe of ETFs is truly large. However, I have included a few below.

SUMMARY

ETFs offer one the ability to construct a meaningful investment portfolio per your own risk and return preferences.  We will cover portfolio construction and its mechanics in the next article.

Bonus: You can do it yourself now and gain wayyyy better returns than those ILPs that financial agents are constantly trying to sell you.

Bonus Bonus tip: If any “financial advisors” pester you about ILPs, just tell them that you invest through ETFs, it works almost as good as telling them i’m a student.