Here’s why ETFs are gaining popularity as an SRS investment option

This post was created in partnership with Nikko Asset Management Asia Limited. All views and opinions expressed in this article are Beansprout's objective and professional opinions. 

What happened?

Over the years, more and more people have been opting into the Supplementary Retirement Scheme (SRS).

Figures from the Ministry of Finance (MOF) showed that there were 387,377 SRS account holders as of December 2022, an increase from less than 100,000 prior to 2013. 

With a total of 4.2 million CPF members, this means that approximately one out of every 11 CPF members has a SRS account. (Source: Singstat as of December 2022) 

What is SRS?

If you are new to SRS, it is a voluntary savings scheme that encourages you to save for retirement while reducing taxable income.

It is basically a complementary scheme to the Central Provident Fund (CPF) system open to Singaporeans, PRs, or foreigners residing in Singapore.

The voluntary contributions made to your SRS account are eligible for tax relief, and the funds within your SRS account can be invested in a wide range of financial instruments such as stocks, unit trusts, and exchange-traded funds (ETFs). 

Why you can consider investing your SRS contributions

Unlike your CPF ordinary account (OA) which offers an interest rate of 2.5% p.a.¹, your SRS account only earns you 0.05% interest on a yearly basis.

Unfortunately, this means that the return is unlikely to be sufficient to help you combat inflation over the long term.

If you have $100,000 sitting in your SRS account for 20 years, this will just turn into a modest $101,004.76 at the end of the period.

An alternative to consider would be to invest your SRS monies in instruments that could potentially earn you a higher return.

What are investors buying with their SRS funds?

You may invest your SRS funds in various financial assets offered by your SRS operator, including:

• Shares, REITs and ETFs
• Endowment insurance plans
• Unit trusts
• Singapore Government Securities (bonds and T-bills)

Amongst these options, shares, REITs and ETFs are the most popular option, with close to 26% of SRS funds invested in these asset classes as of December 2022. This is followed by insurance (25%) and unit trusts (11%).

Close to 21% of SRS funds remain in cash and earn an interest rate of 0.05% p.a.

The interest in ETF investing using SRS is further supported by data by SGX which shows that the combined asset size of ETF holdings directly held by SRS investors has doubled between December 2019 and December 2021.

It does seem like more Singaporeans are using their SRS funds to invest in ETFs. Let us dive deeper to understand why ETFs are a popular option amongst SRS investors. 

Why ETFs are a popular option amongst SRS investors

#1 More diversified than individual stocks

ETFs provide instant diversification as they typically hold a basket of securities representing a particular index, sector, or asset class.

By investing in an ETF, you gain exposure to a diversified portfolio of stocks, bonds, or other assets, spreading your risk across multiple holdings.

This diversification can help mitigate the impact of poor performance from individual stocks and reduce the overall volatility of your investment portfolio.

#2 Some ETFs may track indices that offer consistent and attractive dividend yields

ETFs that track an index that offers a consistent and attractive dividend yield such as the Straits Times Index (STI) may also be considered by income-seeking investors. 

As of 28 February 2023, the STI generated an average dividend yield of 3.7% across a 10-year period^. This is above the dividend yield of other major indices, such as the Hang Seng Index and S&P 500 Index. 

#3 Lower cost compared to unit trusts

Another reason is that ETFs are more cost-effective as compared to actively managed unit trusts.

They typically come with a lower total expense ratio (TER) which represents the annual operating expenses of the fund, including management fees, administrative costs, and other expenses.

A few ETFs to consider for your SRS investments

So, what ETFs can you invest in using your SRS monies?

With SRS, you can choose from the entire suite of SGX-listed ETFs.

Whether you are looking to invest in blue chip companies in a familiar market or potentially earn a higher yield, there is an ETF that you can consider for your SRS funds.

We list some of the popular ETFs from Nikko Asset Management amongst Singaporean investors below and share why investors may have taken an interest in them. 

These ETFs all have a history of more than three years and fund sizes of more than S$300 million as of May 2023.

With CPF, you may only purchase from a shorter list of ETFs.  The four ETFs mentioned below are included in the list of ETFs eligible for CPF investments as well. 

What are the risks of investing in ETFs?

All investments are subject to risks, including the possible loss of principal amount invested.

Investing in ETFs also come with certain risks that you should be aware of. For example, ETFs are subject to market risk, meaning that their value can fluctuate based on the performance of the underlying securities they hold.

Changes in market conditions, macroeconomic factors, or investor sentiment can affect your returns.

How to invest in ETFs using your SRS funds?

Investing with SRS funds offers you a lot more options to choose from as compared to using your CPF funds. But how do you get started?

Before you start investing using your SRS funds, you’ll need to satisfy the following criteria:

• At least 18 years old,
• Not an undischarged bankrupt, and
• Not mentally disordered and therefore capable of managing yourself and your affairs

Thereafter, you can invest your SRS funds with a few simple steps:

• Apply for an SRS account with any of the three agent banks – DBS, UOB, and OCBC
• Link your SRS account and trading account
• Execute your trade

What would Beansprout do?

We like the SRS as it encourages you to save for retirement while reducing taxable income.

However, with the 0.05% interest rate earned on SRS funds, we can consider investment opportunities that allow our SRS funds to work harder. 

ETFs have grown in popularity amongst SRS investors as they allow investors to reap the benefits of investing in a low-cost way and without having to pick single stocks. 

Some ETFs, such as the Nikko AM-StraitsTrading Asia ex Japan REIT ETF, also track indices that offer a consistent dividend yield. 

Click here to find out more about how you can start investing in ETFs using your CPF and SRS funds.

Important Information by Nikko Asset Management Asia Limited 

This document is purely for informational purposes only with no consideration given to the specific investment objective, financial situation and particular needs of any specific person. It should not be relied upon as financial advice. Any securities mentioned herein are for illustration purposes only and should not be construed as a recommendation for investment. You should seek advice from a financial adviser before making any investment. In the event that you choose not to do so, you should consider whether the investment selected is suitable for you. Investments in funds are not deposits in, obligations of, or guaranteed or insured by Nikko Asset Management Asia Limited (“Nikko AM Asia”).   

Past performance or any prediction, projection or forecast is not indicative of future performance. The Fund or any underlying fund may use or invest in financial derivative instruments. The value of units and income from them may fall or rise. Investments in the Fund are subject to investment risks, including the possible loss of principal amount invested. You should read the relevant prospectus (including the risk warnings) and product highlights sheet of the Fund, which are available and may be obtained from appointed distributors of Nikko AM Asia or our website (www.nikkoam.com.sg) before deciding whether to invest in the Fund.   

The information contained herein may not be copied, reproduced or redistributed without the express consent of Nikko AM Asia. While reasonable care has been taken to ensure the accuracy of the information as at the date of publication, Nikko AM Asia does not give any warranty or representation, either express or implied, and expressly disclaims liability for any errors or omissions. Information may be subject to change without notice. Nikko AM Asia accepts no liability for any loss, indirect or consequential damages, arising from any use of or reliance on this document. This advertisement has not been reviewed by the Monetary Authority of Singapore.     

The performance of the ETF’s price on the Singapore Exchange Securities Trading Limited (“SGX-ST”) may be different from the net asset value per unit of the ETF. The ETF may also be suspended or delisted from the SGX-ST. Listing of the units does not guarantee a liquid market for the units. Investors should note that the ETF differs from a typical unit trust and units may only be created or redeemed directly by a participating dealer in large creation or redemption units. 

The Central Provident Fund (“CPF”) Ordinary Account (“OA”) interest rate is the legislated minimum 2.5% per annum, or the 3-month average of major local banks' interest rates, whichever is higher, reviewed quarterly. The interest rate for Special Account (“SA”) is currently 4% per annum or the 12-month average yield of 10-year Singapore Government Securities plus 1%, whichever is higher, reviewed quarterly. Only monies in excess of $20,000 in OA and $40,000 in SA can be invested under the CPF Investment Scheme (“CPFIS”). Please refer to the website of the CPF Board for further information. Investors should note that the applicable interest rates for the CPF accounts and the terms of CPFIS may be varied by the CPF Board from time to time.

The units of Nikko AM Singapore STI ETF are not in any way sponsored, endorsed, sold or promoted by FTSE International Limited ("FTSE"), the London Stock Exchange Plc (the "Exchange"), The Financial Times Limited ("FT") SPH Data Services Pte Ltd ("SPH") or Singapore Press Holdings Ltd ("SGP") (collectively, the "Licensor Parties") and none of the Licensor Parties make any warranty or representation whatsoever, expressly or impliedly, either as to the results to be obtained from the use of the Straits Times Index ("Index") and/or the figure at which the said Index stands at any particular time on any particular day or otherwise. The Index is compiled and calculated by FTSE. None of the Licensor Parties shall be under any obligation to advise any person of any error therein. "FTSE®", "FT-SE®" are trade marks of the Exchange and the FT and are used by FTSE under license. "STI" and "Straits Times Index" are trade marks of SPH and are used by FTSE under licence. All intellectual property rights in the ST index vest in SPH and SGP.

The units of NikkoAM-StraitsTrading Asia ex Japan REIT ETF are not in any way sponsored, endorsed, sold or promoted by FTSE International Limited ("FTSE''), by the London Stock Exchange Group companies ("LSEG''), Euronext N.V. ("Euronext"), European Public Real Estate Association ("EPRA"), or the National Association of Real Estate Investment Trusts ("NAREIT") (together the "Licensor Parties") and none of the Licensor Parties make any warranty or representation whatsoever, expressly or impliedly, either as to the results to be obtained from the use of the FTSE EPRA/NAREIT Asia ex Japan Net Total Return REIT Index (the "Index") and/or the figure at which the said Index stands at any particular time on any particular day or otherwise. The Index is compiled and calculated by FTSE. However, none of the Licensor Parties shall be liable (whether in negligence or otherwise) to any person for any error in the Index and none of the Licensor Parties shall be under any obligation to advise any person of any error therein. "FTSE®" is a trade mark of LSEG, "NAREIT®" is a trade mark of the National Association of Real Estate Investment Trusts and "EPRA®" is a trade mark of EPRA and all are used by FTSE under licence."

Neither Markit, its Affiliates or any third party data provider makes any warranty, express or implied, as to the accuracy, completeness or timeliness of the data contained herewith nor as to the results to be obtained by recipients of the data. Neither Markit, its Affiliates nor any data provider shall in any way be liable to any recipient of the data for any inaccuracies, errors or omissions in the Markit data, regardless of cause, or for any damages (whether direct or indirect) resulting therefrom. Markit has no obligation to update, modify or amend the data or to otherwise notify a recipient thereof in the event that any matter stated herein changes or subsequently becomes inaccurate. Without limiting the foregoing, Markit, its Affiliates, or any third party data provider shall have no liability whatsoever to you, whether in contract (including under an indemnity), in tort (including negligence), under a warranty, under statute or otherwise, in respect of any loss or damage suffered by you as a result of or in connection with any opinions, recommendations, forecasts, judgments, or any other conclusions, or any course of action determined, by you or any third party, whether or not based on the content, information or materials contained herein. Copyright © 2023, Markit Indices Limited.

The Markit iBoxx SGD Non-Sovereigns Large Cap Investment Grade Index are marks of Markit Indices Limited and have been licensed for use by Nikko Asset Management Asia Limited. The Markit iBoxx SGD Non-Sovereigns Large Cap Investment Grade Index referenced herein is the property of Markit Indices Limited and is used under license. The Nikko AM SGD Investment Grade Corporate Bond ETF is not sponsored, endorsed, or promoted by Markit Indices Limited.

Nikko Asset Management Asia Limited. Registration Number 198202562H. 

¹ The applicable interest rates for the CPF accounts may be varied by the CPF Board from time to time.