integrating etfs into your portfolio · reasonable care to ensure that the information contained in...

Integrating ETFs Into Your Portfolio Lim Siyi

OCBC Investment Research

Important Notes

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2

Agenda

• Why ETFs • How to utilise ETFs in your portfolio • Diversification vs. Returns • Examples

3

Capital Preservation is Essential

• Subsequent recovery is difficult

4

S$1,000

S$750

S$500

-50%

+50%

Limiting Your Losses

• Consider risk mitigation as part of your portfolio strategy

5

Source: Bloomberg

-60.0%

-40.0%

-20.0%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

(YTD)

Average returns (30 stocks) Portfolio

What are Exchange Traded Funds (ETFs)?

Investing has Evolved

• Personal investment portfolios no longer

confined to equities

• Bonds, futures, FX, warrants/options are

becoming increasingly common

• Geographical boundaries shrinking

• Link between economies growing

• Investors now look beyond domestic markets for value/growth

• Exchange Traded Funds is just another tool at your disposable

• Levels the playing field for individual investors

• Gives the desired exposure at lower rates

Reasons For Using ETFs

• Performance

• Outperformance over some active funds

• Expressing a view – tactical/strategic allocation

• Managing Risk

• Diversification

• Tradability & flexibility

• Transparency – underlying assets are known

• Cost efficiency

• Spend less versus index funds/unit trusts

• Tighter bid/ask spreads versus underlying securities in index

Core/Satellite

• Use ETFs as part of CORE strategy

• Seek market returns as main portfolio selection

• Utilize the wide range of ETFs available

• Supplement portfolio with directional/thematic plays i.e. stock selection etc

• Use ETFs as part of SATELLITE strategy

• Utilize ETFs to complement existing portfolio

• Supplement portfolio with directional/thematic plays i.e. stock selection etc

• E.g. sector ETFs, commodity-related ETFs etc

Utilising ETFs as part of your Satellite strategy

Example 1: Diversification + Returns

Source: Bloomberg, as of 30 Apr 2013

Counter Returns Annualised Vol

STTF (STI ETF) -6.4% 17.4%

IVV (S&P 500 ETF) 9.5% 21.2%

Portfolio 1.6% 15.8%

STTF

50%

IVV

50%



STTF

20%

SPY

20%

EEM

20%

BND

20%

EMB

20%

100% Developed market equities

• 40% Developed market equities

• 20% EM equities

• 20% DM sovereign bonds

• 20% EM sovereign bonds

STTF

50%

IVV

50%


ETF Underlying Index BBG Expense Volume AUM

Code

Ratio (US$m) (US$m)

SPDR Straits Times ETF FTSE Straits Times Index STTF 0.30% 0.38 301

iShares S&P 500 ETF S&P 500 Index IVV 0.09% 0.03 41,031

iShares MSCI EM ETF MSCI Emerging Market Index EEM 0.66% 2,230 45,474

Vanguard Total Bond Market ETF Barclays US Aggregate Float Adjusted Index BND 0.10% 99 18,182

iShares JP Morgan USD EM Bond ETF JPMorgan EMBI Global Core Index EMB 0.59% 108 6,008

Source: Bloomberg



STTF

20%

SPY

20%

EEM

20%

BND

20%

EMB

20%

Counter Returns Annualised Vol

STTF -6.4% 17.4%

IVV 9.5% 21.2%

EEM -12.4% 33.9%

BND 11.2% 4.7%

EMB 19.9% 11.2%

Portfolio 4.4% 11.4%

Old Portfolio 1.6% 15.8%

40

60

80

100

120

Jan-07 Sep-07 May-08 Jan-09 Sep-09 May-10 Jan-11 Sep-11 May-12 Jan-13

Example 2: Tactical allocation


Aftermath of GFC


• Express view that financial stocks will rebound

• Buy on weakness; ride the recovery

• So which counter to buy?

Counter Before After

Bank of America -54.7% -49.1%

Goldman Sachs -53.6% 57.9%

Wells Fargo -4.2% 12.1%

Morgan Stanley -74.2% 26.8%

Citibank -75.5% -65.8%

JP Morgan -14.6% 18.8%


• Why not consider a SECTOR ETF

• Financial Select Sector SPDR ETF (XLF)

• Seeks to match returns of the S&P Financial Select Sector Index

• Diversified exposure to banks & diversified financial services (40.4%) and insurance companies (26.4%) etc


Code Ratio (US$m) (US$m)

Financial Select Sector SPDR ETF S&P Financial Select Sector Index XLF 0.18% 936 11,804

Source: Bloomberg

Counter Before After

XLF -57.7% 20.4%

Average -46.1% 12.5%



XLF, 50.90

Citi, 8.38

BAC, 23.06

JPM, 101.47

GS, 73.27

WFC, 107.36

MS, 32.77

0

20

40

60

80

100

120

140

Jan-07 Sep-07 May-08 Jan-09 Sep-09 May-10 Jan-11 Sep-11 May-12 Jan-13

XLF Citi BAC JPM GS WFC MS

Example 3: Strategic allocation


0

100

200

300

400

Jan-07 Oct-07 Jul-08 Apr-09 Jan-10 Oct-10 Jul-11 Apr-12 Jan-13

Corn Coffee Wheat Cotton Sugar


Source: Invesco, as of 31 Mar 2013


Code Ratio (US$m) (US$m)

PowerShares DB Agriculture Fund

db Liquid Commodity Index-Optimum Yield Agriculture Index DBA 1.01% 20 1,683

Source: Bloomberg

Corn

12%

Soybeans

12%

Sugar

13%

Live Cattle

13%Cocoa

11%

Coffee

11%

Lean Hogs

8%

Wheat

13%

Feeder Cattle

4%

Cotton

3%



80

100

120

140

160

180

Jan-07 Oct-07 Jul-08 Apr-09 Jan-10 Oct-10 Jul-11 Apr-12 Jan-13

• ETPs vs. Futures

• No margin requirements/ rolling of contracts

• Single-name and diversified exposure available

Utilising ETFs as part of your Core strategy


How do ETFs fit into your investment philosophy?

Sample Risk Profile

Conservative

Moderately Conservative

Moderate

Moderately Aggressive

Aggressive

Greater Risk

Lower Returns

Profile One – Conservative

• Emphasis on income & stability

• Capital preservation is key

20%

50%

30%Blue-ChipEquities

Fixed Income

Cash

Profile One – Conservative

Sample Portfolio

ETF Underlying Index SGX Expense Volume AUM Weight

Code Ratio (US$m) (US$m) / Allocation

SPDR STI ETF FTSE Straits Times Index ES3 0.30% 0.38 301 15%

iShares S&P 500 ETF S&P 500 Index I17 0.09% 0.03 41,031 5%

ABF Singapore Bond ETF iBoxx ABF SG Bond TR Index A35 0.20% 0.02 418 50%


Profile Two – Moderately Conservative

• Retain income goal + some growth opportunities

• Capital preservation still important

30%

10%50%

10%

Large-CapEquities

Small-CapEquities

Fixed Income

Cash

Profile Two – Moderately Conservative

Sample Portfolio





iShares Russell 2000 ETF Russell 2000 Index IWM 0.25% 3,380 20,264 10%



Profile Three – Moderate

• Skewed towards portfolio growth

• But risk tolerance still lower than overall market

30%

15%

15%

30%

10% Large-CapEquities

Small-CapEquities

EmergingMarket Equities

Fixed Income

Cash

Profile Three – Moderate

Sample Portfolio






db x-trackers MSCI Emerging Market TRN ETF

MSCI Emerging Market TRN Index J0M 0.45% 0.01 3,606 15%



Profile Four – Moderately Aggressive

• Emphasis on value growth

• Exposure beyond core market increases

30%

15%35%

15%

5% Large-CapEquities

Small-CapEquities


Fixed Income

Cash

Profile Four – Moderately Aggressive

Sample Portfolio






db x-trackers MSCI EM Asia TRN ETF MSCI EM Asia TRN Index J0N 0.45% 0.01 1,314 35%



Profile Five –Aggressive

• Pure capital appreciation

• Greatest tolerance for risk

30%

30%

35%

5%Mid-Cap

Small-CapEquities


Cash

Profile Five –Aggressive

Sample Portfolio



SPDR S&P 400 ETF S&P 400 Index MDY 0.25% 496 11,896 30%


db x-trackers MSCI EM Asia TRN ETF MSCI EM Asia TRN Index J0N 0.45% 0.01 1,314 15%

iShares MSCI India ETF MSCI India Index I9B 0.99% 2.89 617 10%



Summary of Performance - Returns

Sample Risk Profile Year 1 (%)

Year 2 (%)

Year 3 (%)

Year 4 (%)

Year 5 (%)

Conservative

-12.0 -0.5 12.8 11.5 15.1

Moderately Conservative -18.9 -1.9 14.7 13.0 20.0

Moderate -25.5 -4.2 12.2 7.9 15.7

Moderately Aggressive -32.9 -7.0 10.0 2.7 10.9

Aggressive -34.2 -4.4 14.4 6.1 19.0

Source: Bloomberg, OIR estimates

PERFORMANCE FIGURES FOR ILLUSTRATIVE PURPOSES ONLY

Summary of Performance – Vol

Sample Risk Profile Year 1 (%)

Year 2 (%)

Year 3 (%)

Year 4 (%)

Year 5 (%)

Conservative

7.4 6.3 7.5 8.3 8.2

Moderately Conservative 12.0 9.7 10.2 10.6 10.2

Moderate 16.7 13.4 12.5 12.5 11.7

Moderately Aggressive 24.0 19.3 17.2 16.8 15.5

Aggressive 33.7 26.5 23.4 22.8 21.0

Source: Bloomberg, OIR estimates

PERFORMANCE FIGURES FOR ILLUSTRATIVE PURPOSES ONLY

Choosing the right ETF


Global ETF Growth

Source: BlackRock, Apr 2013

Global ETF issuers

Some of the world’s biggest ETF Issuers

Information from SGX

Source: SGX, ETF Trading Summary (Mar 2013)

Attributes to consider

• Management fee • General rule of thumb – the lower the better

• Tracking error

• Differences between daily change of ETF NAV and Index Value • Lower the better

• Average daily trading volume (Liquidity)

• SGX mandates that each ETF must have a designated market maker

• Type of investment methodology • Full replication, partial or swap-based

• ETF issuer

• Track record, history etc • Assets under management (AUM) of the fund

Thank You

Please visit us at:

• www.ocbcresearch.com

• www.etfiq.com.sg

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