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Musing Over MSCI Emerging Market ETFs


infinitypool@Bali Today we look at one of the many ETFs available to investors looking for an automated investing scheme in the Singapore Exchange.

The SGX site gives a very comprehensive account of what exactly is an ETF or Exchange Traded Fund and the different ETFs available here in Singapore. I have invested in one such ETFs through buying on the internet with my POEMS account. I am persuading my significant other to look at opening a POEMS account under her own name and buying one such ETF at regular intervals.

I am looking at the MSCI (Morgan Stanley Capital Index) Emerging Market ETF issued by Lyxor under the Société Générale Group.

The Emerging Market fund invests into the global emerging markets, according to Investopedia, it buys into the indices of 26 emerging economies of Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Israel, Jordan, Korea, Malaysia, Mexico, Morocco, Pakistan, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, Turkey and Venezuela.

From reading investment books and articles, one of the key reason to investing into emerging markets is that there is a chance for large profits but this is tempered by the chance of large losses too.

As a diversification tool, it is generally less correlated with developed markets like the USA and mature economies of Europe so it is supposed to reduce the overall risk of investing into equities. Within the list are the BRIC countries (Brazil, Russia, India and China) which have the potential to do much better than economies like Singapore which probably have not much more room to room at double digit growth rates.

This is the performance of the ETF according to Lyxor which mirrors that of the overall improvement in the equity market from last year:

ETF Performance

Time Period % Loss/ Gain
3 months +8.29%
6 months +40.62%
1 year +62.06%

The fund is denominated in US$ and charges management fees of 0.65% which compares favorably with the 1% or more annual management fees of their unit trust counterparts.

At the moment, you can’t use CPF funds to buy into the fund, and the minimum size per investment is 10 units which at current prices translates to just about  US$ 91.70 which almost everyone can buy and invest into.

While there is also no sales charge like 1% (current DBS promotion for their unit trusts) to 5%, the following charges apply:

  • Prevailing brokerage commissions;
  • Clearing fees of 0.04% of the contract value (subject to a maximum of SGD600); and
  • Goods and services tax at prevailing rate on brokerage commissions and clearing fees.

So, an investment to ETF makes sense only if you buy in much bigger units than the minimum of 10 as the minimum brokerage is around $20. Thus, if your total purchase is over $1000, only then the cost of purchase will fall below 2% based on the brokerage of $20.

One can look at the SGX site on ETFs Education to garner more information on ETFs.

I will be checking around for more details of this before we do a regular fixed purchase every 3 months and buy into this fund. The fund fact sheet for Lyxor MSCI Emerging Market ETF gives more information on the details.

Anyone bought this fund?

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Anonymous said...
November 5, 2009 at 2:39 PM  

Unfortunately when I invested in one of the BRIC unit trusts, this wasn't around yet ...

Just some comments:

1. That this ETF is denominated in USD makes me a little uncomfortable, given USD's uncertainty.

2. Strange that Taiwan and Korea are considered as emerging markets here.

3. According to the factsheet, 24.46% is invested in the fincancial sector, its highest allocation. The financial market as a whole is still quite uncertain, so it really depends on your reading of the market.

4. The BRIC nations make up only about 47% of the total allocation, so you may not be able to reap their full potential.

5. Your plan to buy every 3 months doesn't appear to achieve the concept of Dollar Cost Averaging. Cos when the unit price go up, you need to pay more for the same no. of units. Hope I got my facts right : )



Lemizeraq said...
November 5, 2009 at 11:55 PM  

1. Yep, if it is in another currency, it adds foreign currency exchange risks.

2. I agree with you on this again. Funny if Hong Kong and Singapore are not in there, then Taiwan and Korea shouldn't be there too.

3. The financial sector is normally the engine for growth too, so for me, this is important as I am willing to take a bit more risk in return for the higher returns.

4. I think that with more countries being involved in this ETF decreases the earlier higher risk factors. BRIC seems to be high risk, with high returns as these are the economies with the greatest potential.

5. Dollar cost averaging can be monthly, quarterly, bi-annually, annually too. And DCA is an automated program that buys at fixed timing each period so that you buy low, buy high and keep buying.

So you buy less units with the same amount when prices are high and you buy more units when prices dips.

The key part for me that it is a disciplined way to invest and you still buy into the market even at its bleakest point.

Thank you for visiting and posting you views about this.

Anonymous said...
November 6, 2009 at 11:47 AM  

Agree with you on 3 and 4. Everyone has to know their risk profile, although if your time horizon is long (say, more than 10 years) then equities are very likley to make money, thereby downplaying the risk element.

For 5, does the ETF also have an RSP mechanism, like UTs?



Lemizeraq said...
November 7, 2009 at 9:12 AM  

Hi W,

For the ETF, there isn't a RSP mechanism, so it is manual work. Have to put down the dates in your own Google Calender or phone to remind you to buy it at that time.


Lancelot Chua said...
December 10, 2009 at 4:41 PM  


Sorry to pop in so late, cos i just read your blog.

Yes, DCA will be a good idea and currency risk is an issue. Despite that, i am more concerned about the Volume of ETFs. The volume of ETFs are relatively low and dont seem to have active trading?

What's your view on this?

Thanks a million

Lemizeraq said...
December 22, 2009 at 7:21 PM  

Hi Lancelot,

Sorry for the late reply. My home modem was down for quite a few days.

The ETFs sold in Singapore has a designated market maker, like a big financial institution. So they will have to take up the buy order if you are selling and vice versa.

But ya, you are correct to be a bit concerned about the low volume as it could be something that forces the companies involved in them to withdraw it due to the lack of interest.


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