What you should know before investing in Singapore ETFs


ETFs are becoming increasingly popular with investors looking for exposure to different markets. Those interested can learn more about investing in ETFs through Saxo Bank. Singapore is no exception, with several available ETFs that offer exposure to the country’s stocks and bonds. However, before investing in a Singapore ETF, there are a few things that traders should know about.

The Singapore market

First, you must understand that the Singapore stock market is relatively small. The Singapore Exchange (SGX) is the 10th largest in Asia, with a market capitalisation of just over SGD700 billion as of early 2020. That compares to over SGD15 trillion for Japan, SGD9 trillion for China, and SGD6 trillion for Hong Kong.

The small size of the Singapore market means fewer companies are listed on the SGX than on other major exchanges. Before early 2020, around 700 companies were listed on the SGX compared to over 2,800 on the Tokyo Stock Exchange and 3,000 on the Hong Kong Stock Exchange.

This lack of diversity can be a problem for investors because it means there is a greater chance that the performance of the whole market will be driven by the performance of just a few companies. This risk is known as “concentration risk”, which investors in Singapore ETFs need to be aware of.

The government’s role in the economy

Another essential thing to understand about investing in Singapore is the government’s role in the economy. The government is a significant shareholder in many of the country’s largest companies, including Singtel (the telecoms company), DBS (the most significant bank), and Keppel Corporation (a conglomerate with businesses in shipping, offshore oil & gas, and property development).

This ownership stake gives the government significant control over these companies and the broader economy. The government has been known to intervene in the affairs of listed companies, mainly concerning matters of national importance.

The currency

Another critical consideration for investors in Singapore ETFs is the currency. The Singapore dollar is fixed to a basket of currencies, which means it is subject to the same fluctuations as those currencies. This peg has been in place since 1973 and has helped to keep the Singapore dollar relatively stable.

However, the currency can still be volatile, and investors must be aware of this when investing in Singapore ETFs.

The tax environment

Investors in Singapore ETFs also need to know the country’s tax environment. Taxes on capital gains and dividends are relatively low in Singapore, at 0% for long-term capital gains and 10% for short-term capital gains. Dividend taxes are also low, at 15%.

However, there is a good reason for these low tax rates: the government does not allow investors to deduct losses from their capital gains. Meaning investors in Singapore ETFs can only offset gains with other gains, which makes it difficult to minimise tax liability.

The regulatory environment

The regulatory environment is the final thing to be aware of before investing in Singapore ETFs. The MAS (Monetary Authority of Singapore) is the country’s financial regulator and is known for being tough on errant behaviour.

For example, in 2018, the MAS fined Goldman Sachs SSGD30 million (SGD22 million) for its role in the 1MDB scandal. The bank was found to have breached money laundering rules and failed to disclose conflicts of interest.

The MAS has also been known to intervene in the markets when there is a risk of instability. In October 2019, the MAS announced that it would be increasing its Singapore dollar supply to prevent “excessive appreciation” of the currency.

ETF risks

While Singapore ETFs offer many benefits, there are also some risks to be aware of. The first is that, as with any investment, there is the potential for loss. Even the most well-established and diversified ETFs can lose money if the markets move against them.

Another risk to consider is currency risk, which is the risk that the value of the Singapore dollar will fall relative to other currencies. If this happens, it will reduce the value of investments made in Singapore dollars.

Finally, there is the risk that the government will intervene in the market or change regulations in a way that adversely affects investors.