Part 1 : Unit Trusts and Exchange Traded Funds

[ghchua]

I got the B.Eng(Hons) also. So, I'am Ah Beng?

Anyway, I also have Diploma in Electronics and Communication Engineering.

Already put down my qualifications in my signature. Learn from Rinpoche one

I don't have any financial-related paper. Self-taught investor. But still put down my qualifications. B.Eng(Hons) doesn't mean dunno any financial stuff.

[starlight1968sg]

Wow, wow ...
Are we having a "show" of degree?

Any from Mathematics?

[bochap]

well, i'm from engineering too. and i also have same diploma with ghchua.
but i'm not as savvy as him in terms of investing...

think it's rare to find mathematics.

[BlueFlix]

An article "Beware Small ETF Trades" to take note of.

http://finance.yahoo.com/etf/education/10

[poweranime]

[quote="choozm"]wilfred,

[u]MSCI Korea ETF[/u]
- Currency Risk = SGD/WON rate
- Forex Cost (1) = SGD > USD, incurred by investor to buy this ETF
- Forex Cost (2) = No or little USD > WON cost incurred by ETF


So the cost saving in term of foreign currency in ETF comes from Forex Cost (2).[/quote]

Sorry to back track so much, but ETFs passively managed their stocks but they do physically hold these stocks right? Its just that they hold it in close if not similar composition as the index. So the passive manager still need to buy Korean stocks, isn't it? If it is a vanguard etf, it is simply a share class that share the vanguard index NAV. I am confused, no USD/WON forex risk for ETFs???

[wilfredling]

poweranime,

ETF fund manager normally do not trade their underlying stocks with the open market. It will however trade with institutions. However when it trade with institutions, there is no currency involved. Insitutions who wants to buy ETF shares have to deliver a basket of stocks to the fund manager in exchange for ETF shares and vice versa.

[choozm]

similar to the stone age trading: exchange a piece of meat with a block of stone knife, no currency.

[wilfredling]

The good old fashion barter trading.

[poweranime]

Orr...like that. Aiyoh how "sua ku" I am Thanks for the explanation. Its cool to know that.

[wilfredling]

Hi all,

It occurs to me that Unit Trusts have one very important plus above ETFs:

Unit Trusts are regulated by Registrar of Companies and Businesses, Monetary Authority of Singapore and CPF Board (for CPF approved Unit Trusts).

ETFs are not regulated by the above.

This implied that should there be a legal dispute, an investor using Unit Trusts will have access to the local courts and regulators. No such privilege is extended to ETFs since that is not within the jurisdiction of Singapore. So buyer beware.

[rasscall]

But if you buy your ETF from a local brokerage, should you have any dispute, can you take a case against the brokerage?

But if your ETF were to collapse, then your case would be against the fund house that manages the ETF, not the brokerage right?

But when you compares UTs and ETFs, the risk of either defaulting would be fairly similar right? Are there any other risks one should consider?

[wilfredling]

But if you buy your ETF from a local brokerage, should you have any dispute, can you take a case against the brokerage?

But if your ETF were to collapse, then your case would be against the fund house that manages the ETF, not the brokerage right?

But when you compares UTs and ETFs, the risk of either defaulting would be fairly similar right? Are there any other risks one should consider?

Investing in Unit Trusts have a few parties involved namely,

1. Trustee
2. Fund manager
3. Distributor
4. Financial Adviser (if applicable)

Any "problem" can occured at any of these 4 entities. For UT approved in Singapore, 1, 2 and 3 are regulated in Singapore. For investor buying from an FA, they are protected by the Financial Advisory Act (FAA) in the sense that FA advising and selling these UT have to be licensed by MAS.

Investing in foreign ETFs also have a few parties involved namely,

1. Trustee
2. Fund manager
3. Stock Exchange
4. Brokerage house

Similarly there can be problems occuring at any of these 4 entities. For 1,2 and 3 are not regulated in Singapore and hence there is no legal protection for Singapore resident. However the brokerage house is regulated under the Securities and Futures Act.

All parties (whether within and outside the jurisdiction of Singapore law) share the same common three risks namely,

1. Fraud
2. Negligent
3. Business failure due to non-profitability

Therefore investors who have access to local legal protection in the event of occurance of any of these risks are certainly better off.

[vision3001]

Wilfred Ling is a freelance writer and is an active participant at http://www.sgfunds.com. He can be contacted at wilf_ling@yahoo.com

Excellent article by Wilfred.

Can supplement with these few articles:

1. What's Wrong With Mutual Funds? (US context)
http://www.fool.com/mutualfunds/mutualfunds01.htm

2. The S&P 500 Index Fund
http://www.fool.com/mutualfunds/indexfu ... ?source=LN

3. ETFs (Exchange-Traded Funds) - A 60-Second Guide
http://www.fool.com/etf/etf.htm

4. Mutual Funds v ETFs
http://www.fool.com/etf/etf02.htm

[vision3001]

Thank you. But I don't have a CFA, CPA or CFP and didn't even have any certificates from any of the modules from 1 to 8. Cannot lah, no paper no value.

But I got CPF, can or not ?

Share with you something encouraging

Do you know that both Buffett and Soros didn't passed many securities industry qualifications that employees of Wall Street firms are routinely required to take?

For Buffett, he avoided Series 7 exam (for stockbrokers), he delayed taking that exam until he left Salomon Brothers in 1991 (he was the SB CEO at that moment.

For Soros, he actually took one of such exam and it was documented that he failed miserably.

Closer to home, Sim might be one such local example that we can use.

Having said that, in the normal distribution curve, Buffett, Soros and Sim are probably those few that fall outside the 3 sigma (98.9%).

[vision3001]

Unit Trusts are regulated by Registrar of Companies and Businesses, Monetary Authority of Singapore and CPF Board (for CPF approved Unit Trusts).

What good is regulation if over 80% of the UTs are giving worse returns than from OA?

Strange that most people invest UTs based on nice glossy printed brochures + this + that... The bottomline is that "black cat or white cat, as long as it's a cat that cannot catch a mouse, it's a lousy cat."

[vision3001]

http://www.fundsupermart.com/main/community/Portfolio_View.tpl?id=P199

Hi GH,

Very good portfolio there.

Among your twenty funds, what's your guesstimate or calculated '[highlight=yellow]average[/highlight] investment time' (pardon me for being presumptuous, 2.5-3.5 yrs?).

Am hoping to calculate your returns p.a.

[slec7166]

how and where can you buy ETF?

[yuen_tms]

Hi,

I am rather new to this forum. Have been investing for about a year in unit trust with an account in fundsupermart and poems. probably navigator soon.

Was reading quite afew articles on ETF and has been interested about it. Read from an earlier msg that you can get ETF from poems but need to have a US exchange. I look through NASD from poems and they offer iShares ETF i think. Correct me if i am wrong. Currently i am not sure how reliable are they. Still waiting for recommendations on ETF and at the moment, I am also reading more about them.

[vision3001]

Check out Ameritrade.com

It's relatively easy for Singaporean to sign up with them... check with their support.

Hi,

I am rather new to this forum. Have been investing for about a year in unit trust with an account in fundsupermart and poems. probably navigator soon.

Was reading quite afew articles on ETF and has been interested about it. Read from an earlier msg that you can get ETF from poems but need to have a US exchange. I look through NASD from poems and they offer iShares ETF i think. Correct me if i am wrong. Currently i am not sure how reliable are they. Still waiting for recommendations on ETF and at the moment, I am also reading more about them.

[yuen_tms]

Hi,
Thanks. I was browsing their website and tried opening an account. However I was unable to due to the options of country available. There is an online assistant whom i was able to chat with. But was told that they were unable to open an account for those who reside in Singapore. I am curious of the mode of payment too. not sure of how money can br transfer to and from them.

[wilfredling]

yuen_tms,

Are you aware that oversea broker are unregulated and not within Singapore's jurisdication? In the event of dispute, your share holdings could be held up perpertually. There are also legal risks involved in investing in ETF itself as I have pointed out in the above posts.

[vision3001]

Hi,
Thanks. I was browsing their website and tried opening an account. However I was unable to due to the options of country available. There is an online assistant whom i was able to chat with. But was told that they were unable to open an account for those who reside in Singapore. I am curious of the mode of payment too. not sure of how money can br transfer to and from them.

Transfer is TT.

Which company did you approach? I know of several real Ameritrade/Datek investors in Singapore.

As for the regulation, it works both ways, many well established brokers in Singapore are also not regulated in the US (note a G8 country). Doesn't that mean you will shy away from them?

Well, as I've told Wifred, it depends on whether you are a local or global investor.

What are the G8 countries? http://en.wikipedia.org/wiki/G8

[wilfredling]

vision3001,

A locally regulated entity provides the investor a cheaper legal avenue in the event of a problem with the party.

A locally unregulated entity provides the investor with NO legal avenue in Singapore. For the investor to pursue and enforce his legal rights, he has to pursue it in the foreign jurisdication which is very much more expensive in terms of legal fees and logistics such as frequenty travels.

Perhaps the sophisticated investor has no such concern but a retail investors may find his entire investment being wiped out due to legal and travelling fees alone.

[anakin]

There are also legal risks involved in investing in ETF itself as I have pointed out in the above posts.

Just wondering, are you changing your mind about ETFs because of the legal risks?

Still not too sure about ETFs, got a question here:
For unit trusts, the fund managers are obliged to buy back the units rite?
But for ETF, since it's like a stock, there might be a possibility that no one wants to buy from you when you want to sell?

[wilfredling]

There are also legal risks involved in investing in ETF itself as I have pointed out in the above posts.

Just wondering, are you changing your mind about ETFs because of the legal risks?

Still not too sure about ETFs, got a question here:
For unit trusts, the fund managers are obliged to buy back the units rite?
But for ETF, since it's like a stock, there might be a possibility that no one wants to buy from you when you want to sell?

I think you need to understand the difference between the benefits of passive investment and the instrument which we can use. There is no doubt that passive investment has many benefits but the problem is that it is not available in Singapore! The pathetic lack of choice and lemons of so-called "passive" fund are expensive. Can someone write to the MP or PM to complain?

So poor retail investors have to seek investment in oversea like ETF and some even try to open foreign brokerage account. While the risk/reward characteristic of the underlying securities are well understood and documented, the other risks involved like remitting money to foreign broker is not!