Dollar-cost averaging into the STI ETF: Are returns higher than lump-sum investing?

What happened? 

Earlier, we shared investors may choose to invest in an exchange traded fund (ETF) that tracks the Straits Time Index (STI) to get a slice of some of the household names that we are familiar with.

Also, investors who are looking for an attractive and consistent dividend yield may also consider looking at the STI ETF. 

This is because there are many stocks in the STI that offer a consistent and attractive dividend yield. 

As such the  average dividend yield of the STI over the past 10 years of 3.7% is above the dividend yield of other major indices, such as the S&P 500 Index and  Hang Seng Index.

This led to questions about whether it might be better to invest lump-sum of to dollar cost average into the STI ETF. 

The STI has grown at 6% on average over the past 56 years

Since its inceptions as the Straits Times Industrials Ordinary Share Index in the beginning of 1967, the Straits Times Index (STI) has been providing a performance benchmark for the Singapore stock market

According to the SGX, the Index has grown at a Compound Annual Growth Rate (CAGR) of 6% over the past 56 ½ years through to the end of July 2023. 

Since April 2002, the STI has been investable in the form of an Exchange Traded Fund (ETF). Data from the SGX shows that the ETF has generated an annualised total return of 6.4% from inception through the end of July 2023.

This total return assumes the ETF dividends are reinvested into units of the STI ETF. The dividends are currently paid semi-annually. 

Is it better to invest lump-sum or DCA into the STI ETF?

Lump-sum investing into the STI ETF at the end of 2019, with dividend re-invested into the ETF units, produced on average indicative 4.8% annualised total returns through to 31 July. 

On the other hand, dollar-cost Averaging (DCA) into the STI ETF from the end of 2019 through to the end of July 2023 generated a indicative 5.0% annualised total return.

The calculation above does not include any transaction fees that may be incurred. 

The better performance of DCA may be a surprise to many, as the DCA method would not have earned the initial dividend distributions unlike the lump-sum method. 

However, the advantage of the DCA method is its ability to mitigate some of the timing risks that come with lump-sum investing. 

This is clearly shown over the full 43 month period from 31 December 2019 to 31 July 2020, where a DCA plan on SPDR STI ETF saw more than the average monthly quota of units purchased in 2020 when there was significant stock volatility. 

In fact, as much as 30% of the total units were purchased at a price less than S$3.00 between March 2020 and February 2021. 

This effectively brought down the average purchase price on the DCA to S$3.087, lower than the S$3.277 otherwise lump-sum investing price at the end of 2019. 

The months of October 2020 and July 2023 provide another educative example on how investors may cumulate more units when markets are depressed and less units when markets have done well. 

For instance, investors utilising a S$1000 DCA on the SPDR STI ETF, would have bought 407 units on 30 October 2020 with units trading at S$2.456. 

Then, on 31 July 2023, with the SPDR STI ETF trading at S$3.447, the S$1000 DCA would see investors acquire 290 units. This represented 30% less units that what would have been acquired on 30 October 2020.

How about if dividends are not re-invested into the STI ETF?

The calculation above assumes dividend distributions are reinvested into units of the STI ETF.

Had the dividend distributions not been re-invested the indicative CAGR would be 4.9%. This is still slightly above the returns from lump-sum investing.

However, one can also argue that the returns could also be boosted if the any unutilised funds and dividends paid out are parked into T-bills and Singapore Savings Bonds to earn a higher yield. 

What would Beansprout do?

For investors who are looking to invest in the STI ETF but do not want to “time the market”, a dollar-cost average method can be considered as it allows us to mitigate some of the market risks.

According to an analysis over the past five years from December 2019, a DCA method into the STI ETF has been shown to generate slightly better returns compared to a lump-sum investing method. 

If you are looking to start a regular savings plan to dollar-cost average into the Singapore market, the most utilised Singapore-listed ETFs by DCA investors in 2022 are:

•  Nikko AM STI ETF
• SPDR STI ETF
• ABF Singapore Bond Index ETF 
• Nikko AM Straits Trading Asia ex Japan REIT ETF
• Nikko AM SGD Investment Grade Corporate Bond ETF

Click here to find out more about Nikko AM STI ETF, including its key holdings and how to buy using a DCA method.