ETFS vs. Individual Stocks: Which is Better for Singaporean Investors?
Choosing between individual stocks and ETFs is a critical decision for investors in the Singapore stock market, impacting both their portfolios and investment returns, especially in light of new developments in global markets. Each approach offers distinct benefits, such as the potential for high returns with individual stocks and the passive diversification provided by ETFs. Investors can meticulously select individual stocks with the potential for significant returns when market conditions are favorable. Global gains can also influence the performance of individual stocks and ETFs in the Singapore stock market.
Conversely, ETFs offer broad market exposure or targeted sector investment, enhancing portfolio diversity and mitigating risks. This guide delves into the fundamentals of both investment vehicles, outlines the pivotal considerations for making an informed choice, and provides insights on constructing a well-balanced portfolio that leverages the strengths of both individual stocks and ETFs.
What Are Individual Stocks?
Individual shares represent a share of ownership in a company's securities listed on an exchange (e.g. the SGX). Purchasing shares makes one a shareholder, entitled to a proportionate claim on the company’s assets and to receive dividends as a form of profit. Their voting power in company decisions is also tied to the number of shares they hold.
Advantages
High Potential Returns: Investing in a single stock that performs exceptionally well can yield returns higher than the market average.
Direct Participation in Company Growth: Holding individual stocks makes investors direct shareholders, offering the opportunity to share in the capital appreciation and potential dividend income from the company’s growth.
High Flexibility and Control: Investors can select specific industries or the following companies to invest in based on their research and judgment, allowing for flexible portfolio adjustments.
Disadvantages
Higher Volatility: Individual stock investments tend to have greater price fluctuations compared to ETFs, and specific company risks such as poor management or industry decline can affect trading, leading to significant losses.
In-depth Research Required: Successful individual stock investing typically requires extensive research and market analysis, which can be challenging for the average investor.
Potentially High Costs: Including but not limited to trading commissions, stamp duties, etc., especially in the case of frequent trading.
What Are ETFs?
ETFs, traded on stock exchanges like the SGX (Singapore Exchange), are essentially investment funds. ETFs replicate a specific index, sector, or strategy by tracking a diversified range of underlying assets, which may include stocks, bonds, commodities, or a combination thereof. These indices often track global gains, reflecting the performance of global markets. Investors can invest not only in ETFs listed on the SGX, but also in global ETFs through many platforms.
Advantages
Diversification: ETFs provide diversified investment opportunities through broad market exposure or focused sector investments, which strengthen portfolio diversification and effectively reduce overall risk. ETFs can also perform well during specific financial periods, such as the second quarter, offering investors a chance to capitalize on economic trends.
Simplified Research Burden: Passively managed ETFs simplify the investment process by eliminating the need for detailed analysis of individual stocks, relieving investors of the pressure to select stocks and the necessity for continuous market monitoring.
Low Cost: ETFs often involve lower transaction costs relative to frequent stock trading, as they can be held longer-term without the need for constant buying and selling.
Disadvantages
Tracking Error: Although an ETF aims to replicate the performance of an index, it may not be able to fully replicate the index due to factors such as management fees, transaction costs and market shocks, resulting in tracking error. Market conditions in the prior week can also contribute to tracking errors, as ETFs may not fully capture the index performance during volatile periods.
Average Returns: Due to diversified investments, ETFs may not provide the high returns of individual star stocks.
Systemic Risks: During a market downturn, ETFs will also decline, although they diversify risks, they cannot completely avoid systemic market risks.
6 Factors to Consider When Choosing Between ETFs and Individual Stocks
There are several key factors that investors need to weigh when deciding between individual stocks or ETFs. Considering the performance of stocks and ETFs at the opening bell can provide insights into market timing and trends. Each factor is analysed in depth below.
Investment Risk
Individual stocks, being concentrated in specific companies, are more vulnerable to specific events, which can trigger price volatility and increase risk. Singapore equities rose, reflecting a positive trend in the Singapore stock market, which can impact the performance of individual stocks and ETFs. ETFs, by spreading risk across a variety of assets, can mitigate the impact of any single asset’s poor performance, thereby reducing overall investment risk.
Liquidity
ETFs, especially those that track mainstream indices, are large in size and have high average daily turnover, typically exhibit superior liquidity on the Singapore Exchange Limited, which owns and operates Singapore's securities and derivatives exchange. The liquidity of individual stocks is more dependent on a company’s market capitalisation, industry position, market interest and specific market events.
Cost-effectiveness
Cost-effectiveness is a critical factor affecting investment returns. Individual stocks may entail higher transaction costs, such as brokerage commissions and research fees. ETFs, conversely, are generally characterized by lower management fees and reduced transaction costs.
Management
Individual stocks facilitate active management, granting investors significant autonomy to tailor their portfolios based on individual market perspectives and objectives. ETFs are primarily passive investment vehicles, designed to track market indices, which may restrict the level of personalization available to investors.
Diversification
ETFs can instantly diversify across a wide range of assets, sectors and even countries, thereby reducing overall portfolio risk. However, diversifying a portfolio with individual stocks requires active management, calling for investors to possess robust market analysis skills, a comprehensive knowledge base, and ample time.
Market Timing and Analysis
Individual stocks offer greater flexibility in market timing, allowing investors to adjust their strategic allocations in a timely manner in response to company-specific news or industry trends. Due to their broad market exposure, ETFs are better suited for long-term strategic allocations and passive investment strategies, potentially offering less opportunity for profiting from market-timing compared to individual stocks.
Investment Strategy for Combining ETFs and Individual Stocksin a Portfolio
Singapore investors aiming to construct a balanced portfolio should aim to find equilibrium between the extensive market exposure offered by ETFs and the targeted growth potential of individual stocks. The following investment strategy utilises a combination of these tools with a sensible asset allocation, followed by regular review and rebalancing, paired with a comprehensive analysis of the Singapore stock market and the global economy.
Asset Allocation
Asset allocation is the strategic allocation of investments among different asset classes to optimise the risk-return profile of a portfolio. In order to achieve a balance between risk and return, asset allocation strategies need to be flexible and responsive to the constant changes in markets, economic cycles, individual financial goals and risk tolerance. A core satellite strategy can be used to diversify and manage risk while enhancing returns.
The core portion of a portfolio typically consists of ETFs that participate in a broad range of markets at a low cost, provide immediate diversification across sectors or indices, and form a stable base against market volatility. The satellite portion of the portfolio is where investors can seek opportunities for higher returns. This section consists of individual stocks with the potential to outperform the market. By focusing on specific sectors or companies with high growth potential, competitive advantages and favourable valuations, investors can enhance the overall return of their portfolio.
Periodic Review and Rebalancing
Regularly reviewing and rebalancing portfolios is essential to maintain alignment with investors' investment objectives, manage risk exposure and enhance long-term growth potential. This approach ensures that the portfolio's asset allocation is consistent with the investor's risk tolerance and investment strategy, even as market conditions evolve. The process involves a systematic reassessment of the composition of the portfolio, taking into account the performance of the various asset classes, changes in economic conditions and the evolving financial situation and objectives of the investor.
The reassessment allows proactive adjustments to be made to ensure that the portfolio is not only adequately diversified, but also able to capitalise on emerging opportunities and effectively mitigate risk. In the context of the Singapore stock market and the wider global economy, it is critical to keep an eye on macroeconomic indicators, market trends and the performance of individual holdings. This alertness helps investors adjust their asset allocation in light of the latest economic data, corporate earnings reports and geopolitical events that may impact the market.
Market Data and Analyses
Effective market analysis is crucial for achieving investment goals. Utilizing various websites for online resources can help investors stay updated on market trends and make informed decisions. Understanding the Singapore stock market and global market trends, economic cycles, and the current market phase—such as recovery, expansion, slowdown, or recession—enables investors to gauge market potential and adjust the balance between ETFs and individual stocks flexibly. Thematic and sector-specific ETFs offer agility, allowing portfolios to swiftly adapt to emerging trends and execute sector rotation strategies.
Investors should adopt a comprehensive approach that combines fundamental and technical analyses when selecting individual stocks. Fundamental analysis evaluates a company’s financial health and intrinsic value, whereas technical analysis focuses on price movements and trading volumes. Integrating these perspectives allows investors to identify stocks with robust growth potential and advantageous entry points. Furthermore, investors must consider the impact of global events, policy shifts, and technological innovations, as these factors can spawn new market opportunities or disrupt the status quo.
Conclusion
In the complex landscape of Singapore stock market, the choice between individual stocks and ETFs is constantly evolving in response to investors' investment objectives, risk appetite and market insights. Individual stocks offer the potential for higher returns and direct exposure to companies, but they are riskier, more volatile, and require time for research. ETFs offer diversification, risk reduction, and cost-effectiveness, but they may not achieve the same high returns as individual stocks.
Investors should carefully assess their own situation and leverage the advantages of both investment types to build a portfolio aligned with their risk tolerance and objectives. Investors can make informed decisions by making full use of educational resources, consulting with relevant investment advisors, continually evaluating investment strategies, and conducting effective risk management.