Saturday, 3 August 2013

STI ETF vs Unit Trusts performance

The proponents of index funds or ETFs always cite low cost as the main advantages over unit trusts or mutual funds. This is especially so for books/websites which "condemn" mutual funds in the US, stating that more than half the funds under-performed the indices they tracked in the long term due to high costs (management fees, sales charge etc). This view is echoed by Andrew Hallam as well, a blogger who I follow.

I only did a brief calculation into performance of local unit trusts vs STI ETF and never really looked in depth into it, until I came across this blog which did a comparison in 2009:

I was quite surprised that the effect of dividends paid out by the ETF played a quite a significant role. As I am vested in unit trusts myself, I decided to do some math myself to find out if the under-performance of unit trust still hold today.

The above shows the 5-year annualised gain of SPDR STI ETF over a five-year period. Excel's XIRR function was used to calculate the annualised returns. Negative values refer to cash outflow whereas positive value refers to cash inflow (dividends in this case). An annualised gain of 4.61% was obtained. Note that dividends are not reinvested.

Next, shown above is the annualised performance of all Singapore unit trusts invested in the equity sector, obtained from The performance includes dividend re-investment, but excludes sales charge and annual platform fees, which are 0% and about 0.5% currently. They are sorted by their 5-year performance value. As highlighted in green, almost all the unit trusts outperformed investing purely in STI ETF.

If the annual 0.5% charge (which I try to avoid) is taken into account, I guess the list reduces to about 51 out of the 12 funds. So if you plan to invest a lump sum, it makes more sense to pay a one-off higher sales charge and avoid the annual platform fees.

From the above comparison, I think there is still a high chance in beating the index by investing in unit trusts, as long as the fees are managed well.