The Great Index Unit Trust Hoax

Whenever I check into a hotel, I get really fascinated by just how crazy expensive some of the items in the minibar are.

One time when I was on vacation, I felt a little hungry so I lumbered over to the minibar and pulled out a pack of cashew nuts – just the regular kind you’d find at any convenience store. Just to be safe, I checked the prices before I tore the pack open, and involuntarily yelled: “NINE DOLLARS FOR A PACK OF TWELVE NUTS?! ARE YOU OUT OF YOUR FRICKIN’ MIND???”

It’s absolutely crazy how people are perfectly willing to pay several times the price for the EXACT SAME PRODUCT – a product that they could have gotten much cheaper elsewhere. We see this everywhere: a Nike sneaker vs a non-branded one, Tropicana orange juice vs a house brand, and beer that costs $12 in a restaurant and $2.50 in the supermarket.

A pack of nuts from the minibar might do a little damage to your wallet, but it’s nothing compared to the damage a unit trust (also known as a mutual fund for my American friends) could do to your long-term wealth.

Costs Matter

I’m not even going to discuss actively managed unit trusts with their high management costs. Nobody takes those seriously anymore – There’s more than enough research that shows that as a whole, actively managed unit trusts are a terrible choice compared to index funds.  Check out here and here.

Today, I’ll just uncover a pricing anomaly I like to call The Great Index Unit Trust Hoax, which involves 2 unit trusts being sold to Singaporean investors. Both charge exorbitant amounts to essentially help you invest in portfolios that you could have easily put together yourself… at a fraction of the cost.

To Infinity… and Beyond!

Exhibit A is the Infinity US 500 Stock Index Fund, which is supposed to help you track the return of the S&P 500. To accomplish this, it hits you with a whopping 0.98% expense ratio.  Now 0.98% may not sound like too much of a big deal, but try compounding that over 30 years and you’re talking about a difference of tens of thousands of dollars of extra cash that’s coming out of your pocket.

But hold on – there’s another, cheaper way for you to track the return of the S&P 500 on your own. You could buy an ETF from Vanguard, which gives you the EXACT SAME RETURN, while charging a mere 0.05% expense ratio. This makes the Infinity unit trust almost 20 TIMES MORE EXPENSIVE than the Vanguard ETF. Yeah, I know.

Home Sweet Home… For 4x The Price

Okay, I hear you say, so maybe that’s a problem unique to the USA.

Oh wait, it’s not.

Presenting Exhibit B, the patriotically-named unit trust MyHome Fund run by Singaporean asset management company Nikko AM. It invests in 1) an ETF tracking the Straits Times Index and 2) the ABF Singapore Bond Index Fund ETF. They’ll charge you a ridiculous expense ratio of 1.2% for all their hard work.

But wait! Did you know that you could totally log onto your online brokerage and invest in 2 ETFs which track the EXACT SAME THING for a fraction of the cost? Namely:

1. SPDR Straits Times Index ETF (SGX Ticker: ES3) – Expense ratio: 0.30%

2. ABF Singapore Bond Index Fund ETF (SGX Ticker: A35) – Management fee + trustee fee: 0.20% (I couldn’t find an exact figure for the total expense ratio on their website – those sneaky bastards – but it shouldn’t  be too far away from the sum of these 2 fees).

Total weighted expense ratio: 0.28%

Ta-daahh! You’ve constructed the exact same product, at a quarter of the cost. And that’s not taking into account sales charges, redemption charges, front-end charges, admin charges, and hire-an-attractive-banker-to-convince-you-to-part-with-your-money charges.

Do Yourself a Favor

My point here is to always, always, read the fine print. The finance industry loves to play down details like these because it means higher commissions for them – commissions that come right out of your pocket.

If you plan on investing passively, do yourself a favor and skip out on the unit trusts. You’re way better off buying the equivalent ETFs instead. Of course, there are a few disadvantages in buying ETFs (eg brokerage commissions, currency exposure, inability to invest in small amounts), but they can be easily circumvented (eg investing regularly using no-minimum commission brokers,  or in the case of the STI ETF, setting aside an amount every month until you can afford one lot). None of the disadvantages of ETFs justifies the tens of thousands of dollars you’re giving up in expenses if you invest in unit trusts.

It would be totally awesome if a reputable fund provider like Vanguard would set up an index fund in Singapore (are you reading this, John Bogle?), which would eliminate all the disadvantages in the para above, and yet charge a reasonable expense ratio that doesn’t require us to give up our first-born child.

In the meantime, stay smart and read the fine print. Save your money for those overpriced cashew nuts from the minibar. At least they’re tasty.

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Some Fund Recs (Because I Survived the Wilderness)

Hola! It’s been awhile, hasn’t it? I’m back after an epic 2-week hiatus where I was literally sleeping in the wilderness, scaling great heights, and constructing a makeshift boat with my bare hands. Okay fine, it’s less awesome than it sounds – I was away at my company’s Outward Bound course for a grand total of 5 days. And the remaining 9 days was spent… recovering. Yeah, you know I’m sexy and rugged like that.

So I haven’t been doing a very good job at keeping this blog updated on a regular basis. Up till my last post, I’ve been managing about one post a week, partly because my posts are so damn long. I can’t help it – I usually have so much to say when I want to talk about something that I go on and on and on and on and before I know it, I’ve spent like 2 hours on a post. Not to mention the time taken to find that perfect, non-copyrighted title picture. Damn you, intellectual property!!

So I’m gonna try something different from now: I’ll try writing shorter, more regular posts, splitting a huge topic out into different bits. Hopefully this way, blogging’s not going to be as daunting of task to me, you won’t get so damn bored with my 1,000 word essays, I get momentum to write more, and you get more fodder to help you hatch a rich life. All in all a good deal for the both of us. I won’t always be able to come up with superdamnentertaining analogies – some of my posts will be factual and serious, but at least I’ll be able to use those to get some blogging momentum.

Are you ready? Good. Here we go.

So I got a comment from Jing asking if I could recommend some Exchange Traded Funds (or ETFs for short). Okay, I’m not a financial advisor. There’s no way that I can decide if a particular ETF would suit your needs. But I can tell you what’s in my portfolio and then you can decide for yourself, kay? These ETFs suit my own personal investing style of a buy-and-hold, dollar-cost-averaged, and index-based strategy (which you can read about here, here and here). And so the five ETFs I currently have in my portfolio are (drum roll please):

1. SPDR Straits Times Index ETF (Ticker: ES3): Benchmark index of the Singapore stock market, traded on the SGX. Comprises 30 blue chip Singaporean companies, some of which are effective monopolies. I invest in this mainly for the home bias, and to mitigate exchange rate risk from the US Dollar.

2. Vanguard Dividend Appreciation ETF (Ticker: VIG): Comprises US companies that have consistently grown their dividends over 10 years or more. Blue chips like Coke, IBM, McDonald’s. I’m a big fan of dividend investing, especially in companies that consistently grow their dividends. Traded on the NYSE.

3. Vanguard FTSE All-World ex-US ETF (Ticker: VEU): Global stock index fund, to give me some exposure into the developed world outside of the US for diversification. Traded on the NYSE.

4. SPDR Dow Jones Intnl Real Estate ETF (Ticker: RWX): I also believe in diversifying across asset classes, and real estate is one of them. RWX is a global, ex-US, real estate fund, traded on the NYSE.

5. Vanguard REIT ETF (Ticker: VNQ): US real estate fund. Okay I admit – I’m biased towards the US because I went to college there. So a large part of my portfolio consists of US holdings, and I invest a small portion of my portfolio in VNQ because real estate plays a particularly pivotal role in the US economy. Traded on the NYSE.

I’m also looking to invest in the ABF Singapore Bond Index Fund (Ticker: A35), another global bond index fund, and some Singapore REITs to diversify, once I build up a large enough equity base.

Okay but before you get all excited and run out and throw your money in these funds faster than army boys at a strip club, let me just say two things:

1. I have a certain investment style (long-term, buy-and-hold, index-based) which may or may not suit your style of investing. There are literally thousands of ETFs out there that can suit just about any investment style. You should decide on your own style and invest in the assets that suit your objectives.

2. I am not your financial advisor and these are in no way outright recommendations that will guarantee you riches and ca$$$hhh moneyyy baby. DO YOUR OWN RESEARCH before you invest in anything. Investing means taking on risk – please don’t be a baby and blame me (or someone else) if you lose money.

Till next time, assuming I don’t die from my sandfly bites, adios!