Matthew Seah answers questions on SPDR STI ETF.

Dear AK,

I am SH, one of your many blog readers. I am currently 21 years old and i am planning to make my first investment through a STI ETF. (Still deciding between spdr and nikko). However i have quite a number of questions regarding SPDR STI ETF; especially after reading its annual report, which i hope you can help to clarify.

These are the questions:

Unitholders’ contributions/(withdrawals)

Creation of units:

2015: 31,366,855

2014: 59,145,817

Cancellation of units:

2015: (149,927,298)

2014: (6,664,213)

Change in net assets attributable to unitholders resulting from net creation and cancellation of units:

2015: (118,560,443)

2014: 52,481,604

Distributions NOTE4

2015: (12,106,500)

2014: (10,726,000)

Total (decrease)/increase in net assets attributable to unitholders:

2015: (109,105,696)
2014: 69,068,372

QN: I found the above information in the annual report but I couldn’t understand what it means. Can you explain?

Matthew Seah: "Each unit of STI ETF is a share of STI ETF. Units are created or cancelled due to the injection of fresh funds or the withdrawal of money from the fund respectively."

Qn: 1 What is net asset attributable to unit holder? Does it just mean net asset value?

Matthew Seah: "Net asset attributable to unit holder is the net asset value, after fees are deducted for selling all the stocks and derivatives (if any) that the fund owns to convert everything into cash."

2 What is collective investment scheme?

Matthew Seah: "A collective investment scheme is a scheme which pools moneys from many people for the sole purpose of investing the pooled funds.

"Mutual funds, unit trusts, endowments and ETFs are examples of collective investment scheme."

3 Quoted derivatives in the form of nil paid rights from Jardine C&C on 15/07/15. What does this mean? I heard that spdr etf uses derivatives to try and minimise tracking error. Is this a significant proportion? What are the risk of it?

Matthew Seah: "Jardine C&C has made a rights offer of 1 for 9 shares.

Click to enlarge.

"STI ETF owns 112,541 shares of Jardine C&C.

"That equates to 12,504 rights that you see on the annual report."

4 If they pay dividends from cash, it seems that they are paying out more than what they have. They only have S$5M+ of cash but paid out 12M+ for 2015?!

Matthew Seah: "It is wrong to say that they paid $12M when they had $5M in cash. What you see as cash is only a snap shot “at 30 June 2015”. What has been paid out is cash they had previously from dividends collected over the six months prior, less management fees.

"Likewise, suppose your bank account has $5,000. It would be erroneous to say the $12,000 you have already spent is more than what you originally had, which was $17,000."

5 Does portfolio turnover ratio have different meaning if the calculation is based on purchases instead of sales? Is lower ratio better?

Matthew Seah: "For a turnover to happen, $1 in stock A have to be sold to purchase $1 in stock B. The portfolio turnover ratio will be the same regardless of purchase or sales.

"A higher purchase happens when there is a net investment inflow, i.e. more investors buying STI ETF units. Alternatively, a higher sales happens when there is a net investment outflow when investors liquidate their holdings. However, these higher purchases/sales numbers are not turnover as no portfolio rebalancing occurs.

"A lower ratio is better."

6 There is a significant increase in portfolio turnover ratio from 31Dec 2014-2015. It jumped from 0.94% to 9.77%! Do you have any idea why it is so? Is it due to the replacement of 3 of sti constituents in 2015? It is considered a one-off kind of thing right?

Matthew Seah: "It is indeed caused primarily by the replacements of STI constituents. It would be one-off when FTSE does not change the constituents on a regular basis. Generally, investors would consider such rebalancing to be one-off."

7 There is a significant increase in payables in 31 DEC 2015 compared to 30 JUN 2015. Is it due to the losses incurred due to the changing of constituents in STI?

Matthew Seah: "Payables in the ETF comes in 2 forms:

"‘Accruals for expenses’ and ‘Amount due to the Manager’. It just meant the fund owes money to to the Manager and third parties. These have nothing to do with losses incurred."

8 Is there a chance/under what circumstances the sti etf will close down?

Matthew Seah: "STI ETF is unlikely to close down."

9. If you are the one considering to buy the sti etf, other than the tracking error, expense ratio, portfolio turnover ratio, p/e, what else would you look at when analysing this etf? Would you read into the past years’ annual report?

Matthew Seah: "Nothing else, really. You should read past annual reports to compare all the parameters you have mentioned to ensure that the Manager has kept tracking error, expense ratio and turnover ratios low, or lower (better) over the years."

10. Where can I get past few years of annual report? I can only find annual report for 2015 and the semi-annual report for 31DEC 2015 on the official website
Matthew Seah:"You can contact them at http://www.spdrs.com.sg/contact/index.html"

Read another blog post on ETFs by Matthew Seah: HERE.