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.

He did CPF top ups but is denied lump sum payment.

Reader:

Hi AK, I'm one of your readers.

With respect to the Retirement Sum Top Up Scheme, I checked with CPF and they mentioned that all funds made under this scheme cannot be withdrawn in lump sum. That is to say that all funds under this scheme and the associated interest earned will be ring-fenced into the RA upon reaching 55.

Neither can such funds be used to meet the FRS /BRS requirement.

If a person wants to withdraw lump sum upon reaching 55, he would need to have at least the BRS sum solely from his Mandatory contributions, then the amount over this sum can be considered for withdrawal as lump sum. (Assuming property pledge)


AK:

That is not what I understand.

When we discussed this with Christopher Tan from Providend who is on the CPF Advisory Committee, we were told that any amount above the FRS is available for withdrawal (except for money from MS Top Ups and the interest earned).


Reader:

Right, so the point here is that the funds from the MS TopUps are not allowed to be considered as part of the BRS or FRS.

My dad wanted to do a withdrawal but they told him that he needed to clear the BRS threshold and funds under the MS top ups are not considered in this regard.


AK:

It doesn't make sense because we are not allowed to have more than the ERS in our CPF-RA. If the MS Top Ups to SA is ring fenced for the CPF-RA, we could end up having much more in our CPF-RA.

This is especially if the person does this regularly and hits the FRS early on in life and continues to contribute to his CPF whether mandatory or voluntary.

If a person does MS Top Up to the max of $161K by 30 years old, for example, he would have $440K by 55 years old (at 4% p.a.) without any further mandatory or voluntary contribution.

If he must set aside a FRS from mandatory contributions alone by age 55, plus this $440K, it would be far higher than the prevailing ERS allowed at that time, I am willing to bet.

They allow MS Top Up to the prevailing MS (FRS) and nothing more. This stays in the CPF-RA. This makes sense.

But in addition to this, FRS must be from mandatory contributions only? That does not make sense.


Reader:

Thanks. But based on the letter which I received from CPF, it seems that they don't allow such withdrawals. My dad made significant topups under MS topup scheme but because his mandatory contributions are not much, they do not allow him any withdrawals, on the basis that the BRS needs to be from mandatory contributions.

He has more than $175k in his RA now but most of it is from MS Topups Do u think it makes a difference if the person is above 55 when they started doing their MS topups ?


AK:

When did he start doing the MS Top Ups?


Reader:

He started topups after age 55.


AK:

Mystery solved :)

The $40+K would have gone into his CPF-RA when he turned 55.

Then, his MS Top Ups after age 55 would go into the CPF-RA too.

It is all locked up for CPF Life.

If he had $175K when he turned 55, then, he would have been eligible for a lump sum withdrawal and the MS goes into his CPF-RA.


Reader:

Ok. Then that probably explains it.
In any case, I'll write in to CPF to confirm this point.

Source: CPF Allocation Rates