Equity component of the Singaporean 3-fund portfolio - SPDR STI ETF and Vanguard FTSE All-World UCITS ETF

The Singaporean 3-fund portfolio is the Singapore version of the Boglehead 3-fund portfolio which is suitable for US citizens. The Boglehead 3-fund portfolio comprises of three components:

- Vanguard Total Stock ETF (home equity; the name is misleading but it comprises only US stocks)
- Vanguard Total World Stock ETF (global equity)
- Vanguard Total Bond Market ETF (home bond; similarly, this is made up of only US bonds)

The Singaporean 3-fund portfolio will be a replication, and thus be:

- Nikko AM Singapore STI ETF (home equity)
- Vanguard FTSE All-World UCITS ETF (global equity)
- ABF Singapore Bond Index Fund (home bond)

I had previously spoke about the bond component of the portfolio, the ABF Singapore Bond Index Fund. You can read about it here: link.

For this post, it will be about the equity part of the portfolio, namely the Nikko AM Singapore STI ETF, and the Vanguard FTSE All-World UCITS ETF.

The Nikko AM Singapore STI ETF

The purpose of this fund is for exposure to the home stock market and the home currency. The Singapore stock market holds less than 0.5% of the entire world's market capitalisation. If we were to simply buy the entire stock market, we would hold less than 0.5% in Singapore stocks.

This is something which is theoretically correct, but not practically feasible. We live in Singapore, earning a salary in SGD and paid by a Singapore-based firm, and paying for things using our home currency. What this means is that our transactions are very dependent on the economy of Singapore.

In order to hedge this risk effectively, we would need more exposure to the Singapore market than simply 0.5%. By mimicking the Boglehead 3-fund portfolio, the Singapore 3-fund portfolio will comprise of the Nikko AM Singapore STI ETF.

What does it comprise of

The STI ETF comprises of the top 30 stocks in the Singapore stock market. By stating "top", it refers to the 30 stocks with the highest market capitalisation. If you know recently, Noble Group was removed from the top 30. Please do not mistake that they were removed because they were making losses. The reason why they were removed was simply that their falling stock price caused their market capitalisation to fall. Market capitalisation = market price of shares x total shares outstanding. It fell so much and out of the top 30.

The Vanguard FTSE All-World UCITS ETF

For this fund, we are looking for a fund that is comprises the entire world's stocks. It is also important that the fund value-weights each stock. This means that Apple (currently the world's biggest company in terms of market capitalisation) should constitute a higher percentage in the fund as compared to Singtel (a local company with much lesser market capitalisation).

According to the website: link, the fund does exactly that. Apple owns 1.67% of the fund, while Singtel is less than 0.50%. The total number of stocks in the fund is 2,952, which is a very high number, sufficient for efficient diversification.

Tax efficient

Some people ask why the Vanguard FTSE All-World UCITS ETF instead of the Vanguard Total World Stock ETF. Essentially, both ETFs track the stocks of the entire world. But, I have chosen the former because of tax reasons. The former is domiciled in the U.K., whilst the latter is in the U.S. We have to pay withholding tax on the entire fund for the latter, meaning all stocks in the fund; but we only pay withholding tax on U.S. domiciled stocks in the fund in the former case.

Since U.S. stocks take up around 50% of the entire fund, we avoid the withholding tax on the other 50% of stocks. The withholding tax rate is 30%, which translates to a 0.15% savings on return. This means that your return is likely to be 0.15% higher by investing in the former fund as compared to the latter fund.

Also, by paying withholding tax, we do not have to pay it out from our pockets. It is deducted at source. What this means is that the tax will be automatically subtracted away from the NAV or the share price of the ETF. So theoretically, if the former fund makes a return of 7%, then latter fund would return 6.85%.

Listed and exchange currencies

The Vanguard FTSE All-World UCITS ETF is listed and traded in British Pounds (GB). Does it mean that we are subjected to currency changes? The short answer is no. Let me explain.

When you buy a stock, the performance depends on the stock, and not in the currency. Suppose I buy a stock for US$1, at an exchange rate of 1.50. I pay S$1.50 to buy one stock.

The stock can rise to $2, with exchange rate staying at 1.50. This means that I get a return of 100%, making S$3 from my original S$1.50. On the other hand, with the same performance, the exchange return may become 1. In this case, the stock return would become US$3, to give me a return of S$3.

In other words, the return on SGD will be exactly the same regardless of the currency that the stock is traded in. Andrew Hallam has written a post on it: link. If you do not understand, you can just remember that it doesn't matter what currency the fund is traded in.

Conclusion

To summarise, you should hold some equities in your portfolio. Equities give a higher return at the expense of higher risk, but in the long run, it does better as a hedge against inflation.
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Serendib
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4 June 2016 at 00:07 delete

VWRL is domiciled in Ireland. The WHT tax on dividends from US-listed securities is 15% due to the US-Ireland tax treaty, so the WHT savings are even greater. More details here:
https://www.bogleheads.org/wiki/Nonresident_alien_with_no_US_tax_treaty_%26_Irish_ETFs

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6 June 2016 at 04:30 delete

Hi Serendib, thanks for this. This is something very useful for us Bogleheads. Thanks!

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Edmund Lin
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13 October 2016 at 19:43 delete

Hihi for Nikko am and abf bond fund I understand that we can buy thru posb by mthly payment but how about vanguard all world ETF? U settle a certain day to buy it once per mth thru your Broking acct ?

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13 October 2016 at 21:46 delete

Hi Edmund,

Thanks for popping by. To answer your question, I set aside one day every 3 months to buy all 3 funds at one go. I feel that it is cheaper to buy direct rather than the POSB plan. You can probably still continue with POSB for the Singapore ETF and then just set aside 10 mins each month to buy the VWRD yourself. Hope it helps!

Lazy Singaporean

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