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Another old article from William

1) What is the minimum amount to invest?
In theory, 1 share. If the price is US$95.00, then US$95.00 is the min. However, due to commission rate, it would make more sense to invest at least S$1500.00.

As for US ETF listed on SGX VS US ETF listed on AMEX, I will refer to use US ETF listed on AMEX. The trading volume in SGX is so low that I worry US ETF may not last long on SGX. Furthermore, I prefer Vanguard Total Stock Market VIPERs (VTI)# rather than iShare SP500 (IVV). VTI is not listed on SGX. However, US ETFs listed on SGX do have their advantages. For example, lower min commission.

# VIPERs stand for Vanguard Index Participation Equity Receipts.

Q2a) Local brokerage-how much commission do I pay?
Well, you can shop around. Typically is 0.3% to 0.4% commission rate with US$18 to US$29 min.

Q2b)invest using online portal like datek, but need to tt money. the tt charges will not justify the savings.
Is oversea broker cheaper? It depends. If you can find an oversea discount broker with commission rate as low as US$4 to US$7, it will be cheaper to TT over. The cost of TT can be reduced by having a standing order with the bank. In this way, you get send $$$ oversea periodically at a lower TT charges. However, I think most discount broker in US do not accept oversea applicant unless you are a US citizens. By the way, datek only accepts citizen of the United States or a Permanent Resident .

c)since we invest in the US market, r we subject to 30% capital gain tax in US
Yes. But I think there is no way out for this problem. If SP500 gives 2% dividend, a 30% tax will be imposed. We have to pay this 30% tax regardless we invest in iShare SP500, OCBC Index fund or active fund managers. One way to reduce tax is to invest in growth stock index fund /ETF which give little dividend. This help to solve one problem but create another. In fact, fund that invests in value stocks (EG Frankin Templeton Mutual Beacon) will end up paying a lot of tax to US Govt. Basically growth stock ETF is the most tax efficient while value stock ETF is the worst. Blend stock ETF like iShare SP500 is somewhere in-between. By the way, most European countries also have withholding tax. EG France is 25% and UK is one-ninth of the dividend paid. No one likes to pay tax but tax management is part of the investment process.

i am very interested to use index fund like ishare to invest but don’t know the way
Open a US trading account and buy the ETF like buying stock.

For you info, iShare is not the only class of ETF. Some of the interesting ones include

1)iShares S&P 500…………..Top 500 companies)
2)SPDR 500…………………Top 500 companies)
3)iShares Russell 3000………(Top 3K companies)
4)Vanguard Total Stock Market VIPERs…….
………………………….Tracks Wilshire5K
……………………….(The whole US market)

I invest in Vanguard Total Stock Market VIPERs (VTI). VTI contains about 3725 stocks. The advantage of VTI is that it is about 60% large cap and 40% med&small cap#. Hence in one ETF, we have access to US large, med and small companies. By investing in VTI, we are taking the US market risk and there is no need to bet value outperforms growth or small outperforms large. Since Wilshire 5000 present the net gain/loss of all investors in US market, by investing in VTI, we position ourselves to outperform most of the investors in US market.

# Wilshire 5000 Capitalization split and definitions

Very sorry that I left out something important. The 30% tax is 30% tax on distribution. This means that dividend tax rate is 30%.

There is no “30% capital gain tax”. Capital gain is free from US tax (for non-resident alien). In another word, if you sell your share 20 years down the road, all the capital gain will be tax free.

However, capital gain distributed out is taxable.
In another word, if the index gain 10% in a year but the fund has a net capital gain of 10.1%, the extra 0.1% has to be distributed out. This 0.1% is taxable.

Don’t worry about this portion, good index fund/ETF will try not to give any capital gain distribution. Board and huge ETF like SPDR 500 and VTI are less likely to give capital gain. ETFs which have higher turnover (eg growth, value stock ETF) are more likely to give capital gain. This is because when a growth stock become a value stock, that stock has to be removed from the growth stock ETF. The sale of the stock trigger potential capital gain.

This is also one reason why I choose VTI. VTI goes after the whole market. The only time VTI is forced to sell all the stock of a particular company is when that company is bought over by CASH.

1) Where can I find the AMEX ETF pricing and board lot size?
American Stock Exchange.
As for ETF lsited on SGX, I do not purchase any share/ETF from SGX, so I afraid I can’t answer your Q.

2) If i purchase through local brokerage firm and settle payment in SGD, they will use in house exchange rate. In that way I can save on TT charges.
Yes, they will use in house exchange rate unless you wish to settle in USD.

By pooling monthly savings of around S$1,000 into quarterly investment. It seems a better investment than index fund.
Yes. It is much much cheaper to invest quarterly in ETF as compared to local index fund.

Any points that I miss out?
Er… I can’t thing of any right new.

**************************************************For VTI last sale 90.08.minimum trade size = 1 share. That means minimum purchase is 1 share which is USD90.08. If I wanted to purchase 10 shares, it will be USD900.80. So on the trading system, i need to type 10 unit to purchsae 10 shares of VTI. Am i correct?
**************************************************Yes. That right.

2)Can you show the useful link for ETF?

Please note that the above web sites are designed for the Americans. Certain things do not apply to us. For example, most Americans think that it is not suitable to DCA into an ETF even with super low commission of US$4 flat. This is because the Americans can buy SP500 index fund from Vanguard with an expense ratio of 0.12% to 0.18%. DCA of US$1000 will take 27 years to breakeven. In Singapore, thing is different.

**************************************************3)What ETF do you recommend to construct a portfolio for 30 years old. fairly agressive. 25 years investment period?
**************************************************I think you should decide your asset allocation first. Determine how much to put into bond, US equity, Europe equity, Asia-Japan equity, Japan equity etc. After you have decided on your asset allocation, then you chose an ETF to fit into your asset allocation. We should not start to select ETF and then try to fit them into an asset allocation.

4)VTI expense ratio is 0.15%, higher than iShares S&P 500 of 0.09%.of course both tracking different index. Even SPDR which track S&P500 has higher expense ratio than ishare500. ishare ETF has the lowest expense ratio?
OK. You have come to the stage of considering the pro and con of different ETF. The possible ETF for your US equity are
1) SPDR 500……………………….(SPY)
2) iShares S&P 500…………………(IVV)
3) Vanguard Total Stock Market VIPERs..(VTI)

Let play king of the ring.

First round: SPY VS IVV
IVV wins. Why? Both SPY and IVV track the same index but IVV has a lower expense ratio. Secondly, SPY does not reinvest the dividend while IVV reinvests dividend immediately. In another word, SPY always has some cash sitting around. This causes dividend lag. In the bear market, the dividend lag will cause SPY to outperform SP500. In the bull market, the dividend lag will cause SPY to underperform SP500. Hence, SPY has a bigger tracking error than IVV.

Second round: IVV VS VTI
This is an interesting one. In term of expense ratio, IVV wins. A $10,000 investment in IVV and VTI will grow into $170,261# and $167,495# in 30 years respectively. IVV outperforms by 1.62%. If you chose ETF base on expense ratio alone (which is not a bad idea), IVV wins

However, I buy VTI because it has some advantages.
A) First of all, as I had written in earlier, Wilshire 5000 presents the net gain/loss of all investors in US market. Invests in VTI will position ourselves to outperform most of the investors in US market. IVV only covers the top 500 companies.

B) VTI is about 60% large cap and 40% med&small cap. Hence in one ETF, we have access to US large, med and small companies. By investing in VTI, we are taking the US market risk and there is no need to bet value outperforms growth or small outperforms large. IVV only covers the large companies.

C) There are two schools of thoughts in investment in large companies and small companies. The first one is reversion to the mean and the second is Fama and French Three Factor Model. To cut the long story short, reversion to the mean believes that large companies and small companies stocks will gives the same return over super long period of time. Fama and French Three Factor Model believes that small companies stock will give better return as they have higher risk.

From 1970 to 1998, over a period of 28 years, Wilshire 5000 and SP500 gives exactly 13.7% gain pa. After 1998, SP500 outperforms Wilshire 5000.

If reversion to the mean is correct, then chance that Wilshire 5000 will outperform SP500 in near future. Wilshire 5000 just need to outperform SP500 by 0.11% pa in order for VTI to recover the extra expense.

If Fama and French Three Factor Model is correct, the medium and small stocks in VTI will outperform large cap. Hence, if Fama and French Three Factor Model is correct, Wilshire 5000 will outperform SP500.

The debate of reversion to the mean VS Fama and French Three Factor Model will never end.

So, for second round: IVV VS VTI, you decide who is the winner. There is one thing that we can be quite certain. Regardless you invest in IVV or VTI, your return will be much better than invest in active funds. 25 years later, even the ETF that you buy underperforms the other; the difference is likely to be small. This is because SP500 make up 80% of Wilshire 5000. In my opinion, just pick one and stick to it.

# Assumptions
1) Projected market return of 10%
2) Exclude commission, inflation and tax.
3) Assume no capital gain distribution.

**************************************************I’m asking abt the how the asset allocation should be done and what ETF to use
**************************************************There is no different between asset allocation base on ETF and asset allocation base on unit trust. For example, Fundsupermarts recommended aggressive portfolio asset allocation is


A pure ETF portfolio will be
1)US……………31%(IVV: 0.09%, VTI: 0.15%)
2)EAFE………….30%(EFA: 0.35%)
3)Emerging Market..29%(EEM: 0.75%)
4)Tech………….10% (QQQ: 0.20%, IXN: 0.65%)
1) Percentage besides the ticker symbol represents the expense ratio.
2) EAFE is about 70% Europe and 30% Japan.
3) About 50% of EEM is in Asia.
4) Please take note that iShare MSCI Pacific excludes Japan ETF (EPP) in NOT equivalent to Asia exclude Japan fund. MSCI Pacific excludes Japan only includes developed countries (Australia, HK, SG, NZ) in the region.
5) If you do not wish to invest in Japan, you can replace EFA with Europe ETF (IEV:0.6%, FEZ:0.30%, FEU:0.30%).

If you want an ETF + unit trust portfolio
1)US ETF……………31%(IVV: 0.09%, VTI: 0.15%)
2)1st State Reg China…………4.5% (Unit trust)
3)1st State Asia-Pac Gth……..13.5% (Unit trust)
4)Franklin Templeton F-Korea…..6.5% (Unit trust)
5)Europe ETF…23%(IEV:0.6%, FEZ:0.30%, FEU:0.30%)
6)Technology ETF……10% (QQQ: 0.20%, IXN: 0.65%)
7)Schroder Japanese Equity Fund…4.5%(Unit trust)
8)Schroder Singapore Trust………7% (Unit trust)
1)FEZ and FEU are listed on New York Stock exchange.
2)FEZ invests in Eurozone which exclude UK.
3)FEZ and FEU have only 50 stocks in the ETF as compared with IEVs 350 stock)

Basically, ETF can replace most US, Europe, Japan and US/global sector (EG tech, healthcare) unit trusts in Singapore. This means that ETF can cover at least 60% of your equity portfolio. You can take you current portfolio and execute a one to one replacement.

In the decade through 1997, the average European active unit trusts in US returned 10.2% while the European stock index returned 14.6%

It is difficult to compare active funds VS index funds for non-US unit trusts. This is due to lack of data. If we want to compare how active VS index funds perform over 30 years, we need to have some unit trusts which are 30 years old. According to, the oldest US unit trust (American Funds Investment Company of America) is 45 year old. But the oldest European unit trust in US (BBH European Equity) is only 13 years old.

By 31 March 2003, BBH European Equity returned 5.08% since inception while MSCI European Index returned 6.14%. Hence, BBH European Equity underperforms by 1.06%. For the year 1991 to 2002, MSCI European Index returned 7.54% while Vanguard European Stock Index Fund returned 7.48%. Hence, Vanguard European Stock Index Fund underperformed by 0.06%.

Although the studies of active European funds VS index funds are not as extensive as US funds, most studies lead to the conclusion that active European funds will under perform index funds.

What about Japan and Emerging Market (EM)? Not much that been done in this are as the number of old funds is low. Founder of Vanguard, John C. Bogle, said that index funds maybe work in Japan and EM.

As far as my own retirement investment is concerned, active VS index fund for Japan and EM is not a big issue. This is because I do not invest in Japan and Asia. I do not invest in Japan as its economy has not recovered. If Japan economy recovers, I can combine European and Japanese ETF into a single EAFE ETF or just get a Japanese ETF.

As for Asia-Japan, I feel that Asia-Japan is too risky. The follow are return of each regions for the past 11 years. Unfortunately, all values are computed in US$ rather than S$.



*MSCI Europe
**MSCI AC Far East Free ex Jap ID
(China, Hong Kong, Indonesia, Korea, Malaysia, the Philippines, Singapore, Taiwan and Thailand)
(Argentina, Brazil, Chile, China Free, Columbia, Czech Republic, Greece, Hungary, India, Indonesia, Israel, Jordan, Korea, Malaysia, Mexico Free, Pakistan, Peru, Philippines, Portugal, Poland, South Africa, Sri Lanka, Taiwan Free, Turkey, Thailand, and Venezuela)

If we need 10 to 15 years to filter out most of the risk of US market, Asia exclude Japan will take at least 20 to 25 years. Hence, I will rather give up the potential higher return than to take the risk.

I was running a check on the funds table, the handful of funds seems to outperform Infinity European Stock Index by quite a margin. It might not be accurate as most of them are under 5 years old.
OCBC European Stock Index Fund is only 2 year old.
Hence, the comparsion is not accurate. According
to the study by Fundsupermart, “European funds here tended to outperform the index because as seen from our analysis, in most years they underperformed.”

The other thing that I noticed that is weird is the underformance of the Index Fund comparing to MSCI Europe.
May I know how do you do the comparsion?
When we compare the performance of index fund VS
index, there are two things to look out for. First of all, ensure both the index fund and the index are in the same currency. Secondly, when we quote the gain/loss of an index, usually we do not include dividend. We should compare the TOTAL return (capital gain + dividend) between an index and index fund.

BTW, all the figures quoted in my earlier post are total return. It is quite meanless to talk about the capital gain of an index and forget about the dividend.

Index fund will always underperform the index. In fact, return of index fund should be total return of index – expense of fund. That why cost is important.

I think the most accurate comparison is the performance report of the OCBC fund. According to the annual report, by 31 December 2002, the performance of the following funds are

Index Fund…….Fund Ret*…..Index Ret*……Underperform
MSCI Europe……-38.8%………36.8%……….2%
MSCI World…….-40.7%………-38.6%…………2.1%
* Since inception in S$. On a bid-to-bid basis in
SGD terms, with net dividends reinvested at the bid price.

The date of inception is 31 May 2000. Hence on 31 December 2002, the 3 funds are about 2.5 years old. The expense ratio for SP500, MSCI Europe and MSCI World are 1.1%, 1.26%, 1.23% respectively. Over 2.5 years, the total expense for SP500, MSCI Europe and MSCI World are 2.75%, 3.15%, 3.10% respectively.

Hence, European stock index fund should underperformed by 3.15%, but it actually underperformed by only 2%.

I believe European Stock Index Fund can underperform by 2.0% rather than 3.15% because of cash holding. Most index funds are almost 100% invested in the market. For OCBC index funds, I believe OCBC will keep some cash in Singapore to meet redemption. This will cause all OCBC index funds to slightly outperform(before cost) the index in the bear market and slight underperform in the bull market.

In conclusion, OCBC index funds do what they are purpose to do. Just track the index. The different is that due to higher cost than US counterpart, we will expect them to underperform by a larger amount.

However, as what I had wrote in earlier post, our expensive OCBC index funds are still sufficient cheap to outperform active funds by a large amount in 10, 20 and 30 years.

When we purchase the VTX through local broker, what will happen when VTX declare dividend and capital gain?

I guess we will have to do the reinvestment of dividend and capital gain by ourselves. That means pooling into the quaterly investment.

Although Fidelity is coming in but they still distribute through conventional channel, guess no way to bypass loading. Just wondering whether Vanguard will offer something different. if not the only way to go is ETF then.

When we purchase the VTX through local broker, what will happen when VTX declare dividend and capital gain?
VTX??? I believe you mean VTI. All dividend and capital gain (touch wood. Let hope that we will never receive any capital gain) from ETF will be given to us in cash. The 30% withholding tax will be imposed. Depend on your local brokers, they may transfer the distribution into your bank account or they may send you a check. My broker sends me a check.
I guess we will have to do the reinvestment of dividend and capital gain by ourselves. That means pooling into the quarterly investment.
This is not a big problem. Distribution is given out quarterly or in some case bi-annually. If you DCA into an ETF 4 times a year, you can combined your new cash with the distribution and invest in the ETF. Do not invest just before an ETF gives out distribution. You will be paying extra tax. We call this buying dividend.

Although Fidelity is coming in but they still distribute through conventional channel, guess no way to bypass loading.
Er ???? I do not expect much from them. Let wait and see. Im not so worry about load. Load is an one-time affair but expense cost is deducted everyday.

Just wondering whether Vanguard will offer something different. if not the only way to go is ETF then.
Vanguard is going global but at a rather slow rate. Vanguard starts in US but until today, Vanguard has not setup a shop in Canada. BTW, VTI is run by Vanguard.

So there will only be capital gain/loss if the fund disposed of the shares. If we buy the whole index, the turnover will be low hence less capital gain/loss
That right. Please note that we will not be tax for capital gain if we sell the ETF. Only capital gain distributed by the ETF will be taxable.

which ETF u use for Europe index?
I am still building the US portion of my portfolio. In another word, I do not own any Europe ETF. I do not add Europe ETF in orders to keep the total expense ratio (includes fee) of my portfolio below 0.4%. This is the restriction I impose on myself. When my portfolio grows to a sizeable amount, I will add Europe ETF. A likely candidate is Fresco Dow Jones STOXX 50 @ NYSE. Im also looking into STOXX 50 LDRS @ London Stock Exchange. Unfortunately, not many brokerage firms in Singapore have access to London Stock Exchange. Furthermore, there is a high min commission rate. One of the brokerage firm charges a min commission fee of 50 pounds (about US$84).

starting 1/7/2003, S$2/counter/month will be charged for foreign shares. it will be waived if u do at least 2 deals in the months. it’s really not fair. : (
Im very disappointed by much decision. They should try to cut down cost. For example, whenever I buy an ETF, my brokerage firm will send me a contract note by POST. I wonder how much $$$ is wasted in printing and sending all contract notes. If there are 1000 transactions in a day, the staffs have to print 1000 contract notes, place them into 1000 envelopes manually and post them to respective investors. If Singapores law allows, the contract notes can be computer generated and send to my email account. Here is another example. When I opened the trading account, I request the brokerage firm to electronically transfer all dividends to my bank account. This request is rejected. I receive my dividend via check by POST. I ask them why? Well, electronically transfer is available only to bank account at XXX bank. Why? Because the brokerage firm is own by XXX bank. Which is cheaper? Electronically transfer service or check service?

there goes all the savings………no choice but
stick to OCBC index fund.
Err. Not so fast. All the fees are a flat fee. As your portfolio grows, the impact of such fees is lower. For me, the above new fee increases my investment cost my 50%. My current expense ratio (for VTI) is 0.31%. OCBCs index funds expense ratio is 1.1%.
Hence, for me, ETF is still better. The funny thing is that I pay 0.15% for VTIs expense but I pay 0.17% for brokerage firms dividend handling fee and inactive fee. I will think that even with this new inactive fee, ETF is still better than OCBC index fund. If you invest US$5000 in VTI, your expense is US$7.5+S$20+S$24 = US$33.5. This is gives an expense ratio of 0.67%. This is lower than 1.1% for OCBC index fund. If your portfolio grows to US$20,000, your expense is US$30+S$20+S$24 = US$56. This is gives an expense ratio of 0.28%.


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Saturday 3rd of March 2007

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