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How To Build A Powerful Portfolio

With Top Global ETFs

Tan De Jun

Equity Analyst, Stocks and ETFs Research

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Outline

• Exchange Traded Funds 101

• Things You Should Consider Before You Select An ETF

• Introducing The ETF Focus List

• Investment Strategies Using ETFs

• Sample ETF Portfolio

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Exchange Traded Funds 101

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Introduction To ETFs

• ETFs are a cross between a stock and a fund.

– Gives investors access to a portfolio of stocks, bonds

or other asset classes, providing diversification

through a single trade.

– Offers investors the flexibility of buying and selling

anytime during market hours.

• Index tracking funds that trade like stocks on an

exchange.

• Primary objective of an ETF is to replicate the

returns of its underlying index.

• ETFs are mostly passive instruments designed

to be the market, not beat the market.

FundsDiversified

ETFsDiversified like funds and trade like stocks

StocksTradable during market hours

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Popularity OF ETFs Over The Years

• Between 2008 and 2017, ETF assets

under management (AUM) grew at a CAGR

of 25%, to more than USD 4 trillion today.

• There are over 4000 ETFs today that track

almost every major indices for stocks,

bonds and even commodities, offering

exposure to virtually every corner of the

market.

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Reaching Every Corner Of The Market With ETFs

Type Exposure

Equity

STI ETF Singapore’s equity market

VanEck Vectors Semiconductor ETF US semiconductor industry

Fixed Income

Nikko AM SGD Corporate Bond ETF Singapore’s corporate bond market

Commodities

SPDR Gold Shares Price of gold

Smart Beta

Vanguard Growth ETF US large cap growth stocks

Leveraged & Inverse

Samsung HSCEI Daily (2x) Leveraged Product 2x daily returns of the HSCEI index

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Leveraged And Inverse ETFs

• Leveraged ETFs seek to amplify the daily

returns of its underlying index.

• Inverse ETFs aim to deliver a return based

on the inverse performance of its

underlying index.

• Both are used mainly for short term

speculation, and not meant to be held for

the long term.

• Risky products that can run up huge losses

in a short span of time.

1%

-1%

2%

-2%

-1%

1%

-3%

-2%

-2%

-1%

-1%

0%

1%

1%

2%

2%

3%

Index Return 2x Leveraged ETF Inverse ETF

Index Up

Index Down

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Benefits Of Using ETFs

• The average expense ratio of an ETF is generally lower than active mutual funds, helping investors save costs.

Cost Efficient

• A single ETF is made up of several individual securities, ETFs are highly diversified investment vehicles.

Diversification

• ETFs offer access to various markets and asset classes that may not be accessible to retail investors.

Accessibility

• ETFs can be traded at anytime during market hours, allowing investors to enter and exit positions quickly. The exact price of the transaction is also known.

Trading Flexibility

• ETFs are highly transparent in their holdings, with most of them disclosing their holdings daily.

Transparency

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Things you should consider before you

select an ETF

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Exposure: Know What You Are Buying Into

• Understand the index

– What does this index represent?

– What are its top 10 holdings?

– Index methodology? E.g. (market

cap/equal/price weighted?)

• How closely has the ETF tracked its

benchmark?

– Tracking difference is the difference between an

ETF’s performance and the performance of its

underlying index.

– A small tracking difference is desirable as it

ensures that investors are getting the same

exposure as the underlying market.

– Contributors of tracking difference are expense

ratios, representative sampling and securities

lending.

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Structure: Physical vs. Synthetic

• Physical ETFs can either be fully or partially

replicating.

• In partial replication, the ETF holds only a

sample of the index.

• ETFs with a large number of constituents and

those with less liquid securities typically use

partial replication. (E.g. Bond ETFs)

• Partial replication is a source of tracking

difference.

• Synthetic ETFs are normally used for restricted

markets, commodities, leveraged and inverse

products.

• Synthetic ETFs exposes the investor to

counterparty risk.

Physical ETFs Synthetic ETFs

Underlying Index

Securities

Swaps &

Collateral

Counterparty

Risk

Limited High

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Expense Ratio: Every Cent Matters

Expense Ratio

0% 0.5% 1% 1.5% 2%

Year 0 $10,000 $10,000 $10,000 $10,000 $10,000

Year 1 $11,000 $10,950 $10,900 $10,850 $10,800

Year 2 $12,100 $11,990 $11,881 $11,772 $11,664

Year 3 $13,310 $13,129 $12,950 $12,773 $12,597

Year 4 $14,641 $14,377 $14,116 $13,859 $13,605

Year 5 $16,105 $15,742 $15,386 $15,037 $14,693

Impact On Returns

($)-$0 -$363 -$719 -$1,069 -$1,412

Impact On Return

(%)-0% -2.25% -4.46% -6.64% -8.77%

Source: iFAST Compilations; Data in USD terms

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Assets Under Management

• Assets under management (AUM) is a measure of the total market value of assets an ETF

holds.

• ETFs with large AUM tend to have lower expense ratios as expenses are spread across a

larger asset base.

• ETFs with larger AUMs will also tend to have higher liquidity.

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Liquidity: Ease Of Buying And Selling

• Liquidity is a measure of how easy or

difficult it is to buy or sell an ETF quickly

without affecting its price.

• ETFs have 2 layers of liquidity

– Secondary liquidity (on-screen liquidity)

– Primary liquidity (creation and redemption

process)

Secondary

Liquidity

Primary Liquidity

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Other Considerations

• Currency risk

– When the ETF currency differs from the local currency, investors will be exposed to currency risk.

– To mitigate this risk, investors can consider using currency hedged ETFs.

• Taxes

– Depending on where your ETF is domiciled, there are different tax implications.

• Execution risk

– ETFs may be mispriced when the ETF market and the underlying securities market are open at different

times.

– It is better to trade international ETFs at times when their underlying securities market is open.

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ETF Focus List

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What Is The ETF Focus List?

• Specially curated list of ETFs across 6 categories:

– Core Equity, Core Fixed Income, Regional Equity, Country Equity, Sector Equity and Commodities.

• Serves as a starting point for new investors, guiding them through the vast number of ETFs

available.

• Source of ideas for the more experienced investors, and can even be used to build an

entire portfolio made out of ETFs.

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Investment Strategies Using ETFs

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Express A Sector View

• All major sectors and most industry groups

have an index that tracks it.

• ETFs are a convenient tool to increase

sector exposure with a single transaction.

• The use of sector ETFs minimises company

specific risk and helps investors diversify

their portfolio.

• Best used when the overall sector outlook

is positive.

Sector Industry Group

Energy Energy

Materials Materials

Industrials Capital Goods, Commercial & Professional

Services

Transportation

Consumer Discretionary Automobiles & Components

Consumer Durables & Apparel

Consumer Services

Media

Retailing

Consumer Staples Food & Staples Retailing

Food, Beverage & Tobacco

Household & Personal Products

Healthcare Equipment & Services

Pharma, Biotech & Life Sciences

Financials Banks

Diversified Financials

Insurance

Information Technology Software & Services

Technology Hardware

Semiconductors

Telecommunication Services Telecommunication Services

Utilities Utilities

Real Estate Real Estate

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Core-Supplementary Portfolio Approach

• Core Portfolio

– Invested in broader regions such as US, Europe and Asia ex-Japan, providing diversified exposure to global

markets.

– Assets here are held for the long-term and forms the foundation around which the entire portfolio is built.

• Supplementary Portfolio:

– Invested into specific areas of the markets, where there is an opportunity to earn above average returns.

– Flexibility to make tactical allocations to specific sectors, countries or even investment styles which the

investor is positive about.

– Has to be closely monitored for changes.

– Supplementary portfolio should be capped at 20% to ensure that the overall portfolio does not become

overly aggressive.

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Sample ETF Portfolio

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Sample Core-Supplementary Portfolio

• Core-supplementary weightings

– Supplementary portfolio should be capped at

20%

• Asset allocation

– Determined by your individual risk tolerance

– Equities vs fixed income

• Intra-asset allocation

– Equities: sectors, investment styles

– Fixed income: investment grade, high yield,

short duration bonds

• Geographical allocation

– Lower correlation between markets should lead

to lower portfolio volatility.

– Plenty of opportunities beyond the local ETF

market. (E.g. NYSE, HKEX)

Core Portfolio Weight (%)

iShares Core MSCI Asia ex Japan ETF 20

Vanguard FTSE Europe ETF 10

iShares Core S&P 500 ETF 10

iShares MSCI Japan ETF 5

Nikko AM SGD Corporate Bond ETF 15

Vanguard Total International Bond ETF 15

iShares Core US Aggregate Bond ETF 10

iShares JP Morgan EMB ETF 5

Subtotal 90

Supplementary Portfolio

BMO Hongkong Banks ETF 5

Invesco China Technology ETF 5

Subtotal 10

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Thank You

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Disclaimer

All material and content are strictly for informational purposes only and should not be considered as an offer, or solicitation, to deal in any of the funds or products found in this presentation. While iFAST Financial Pte Ltd ("IFPL") has tried to provide accurate and timely information, there may be inadvertent delays, omissions, technical or factual inaccuracies and typographical errors. Any opinion or estimate contained in this presentation is made on a general basis and neither IFPL nor any of its servants or agents have given any consideration to nor have they or any of them made any investigation of the investment objective, financial situation or particular need of any user or reader, any specific person or group of persons. You should consider carefully if the products you are going to purchase are suitable for your investment objective, investment experience, risk tolerance and other personal circumstances. If you are uncertain about the suitability of the investment product, please seek advice from a financial adviser, before making a decision to purchase the investment product. Past performance is not indicative of future performance. The value of the unit trusts and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice. Please read our full disclaimer in the website.