A low-cost income investment portfolio is crucial for retirement planning. Without a portfolio of income-generating assets for passive income, you will never achieve financial freedom. But there are some practical issues to consider.

As an independent financial adviser, I spend a lot of time constructing portfolios which will make sense to local investors. Yes, there are a lot of financial products and portfolio theories. But the strategies that most people talk about are based on the assumption of America investors.

In reality, they often don’t work well for an Asian investor. In fact, the value and financial systems are vastly different between the west and the east. This has become apparent in the current US-China trade war.

That is why when a local Robo-adviser – StashAway – launched an “SG Focused Income Portfolio”, I was greatly interested. The interesting thing is, despite Robo-adviser’s promise of transparency, the information they provided was quite opaque.

But using a bit of financial knowledge and analysis, I will try to deconstruct this portfolio and give you a better insight.

A bit about Robo-advisers

Robo-advisers are a class of financial adviser that provide financial advice and Investment management online based on mathematical rules or algorithms. They use software to automatically allocate, manage and optimize clients’ assets. Seedly has a comprehensive list of Robo-advisers in Singapore. You can check them out here.

Despite the claim by many Robo-advisers that they will ultimately replace traditional advisers, I have a different vision.

Robo-advisers will eventually become the tools that a truly independent financial adviser uses to assist their clients in the future. – Ivan Guan

It is not a war between robots and humans, but a complementary relationship to leverage the strengths of each other.

The fact is that the most famous Robo-adviser, Betterment, has already embraced this path by building platforms for advisors. Check it out here.

How technology makes a low-cost income investment portfolio possible

When I started out as a financial adviser more than 10 years ago, I struggled to find a way to construct good income portfolios.

The financial industry was focused on selling high-cost investment-linked insurance products, “I-kill-you-later” structured notes and high commission unit trusts.

Despite all the knowledge I had, there was no efficient way for portfolio construction in Singapore. It is not so simple to just buy an STI ETF and tell yourself that you have a portfolio.

Over the years, things changed fast. Many new financial instruments have launched and new platforms are available. Today, investment platforms like iFast Financial empower independent financial advisers to assess thousands of financial products and bring the sales charge of unit trusts to zero.

(By the way, you only have yourself to blame if you are still buying funds from the banks.)

This is where I can put all the piece together, be it funds, ETFs, or stocks and bonds, to construct a global income portfolio for my clients.

What an Income Portfolio looks like

StashAway’s Income Portfolio gives a good glimpse of how an investment portfolio can look.

What they have done is not something new but they did it in an intuitive and easily understood way.

Here is some information provided by Seedly,

  • The portfolio consists of 6 ETFs that are traded on the Singapore Exchange: Straits Times Index, SG Government Bonds, SGD Investment Grade Corp bonds, Asia high yield corporate bonds, S-REIT, Asia ex-Japan REIT.
  • 539 underlying securities.
  • The projected income is 3.75% per annum.

Although they hide all the underlying assets, my wild guess is that the StashAway portfolio is constructed in the following manner.

It means you can actually construct this portfolio all by yourself without going to StashAway and paying them the 0.80% management fee. Then the next question is…

Does it make sense for you to buy these ETFs all by yourself?

Very often, I hear people saying things like, “I don’t want to buy funds, I only use ETFs because they are low cost”.

People often repeat what they’ve heard without verifying if it is true or if they have repeated it correctly in the first place. – Ivan Guan

The fact is that ETFs are also funds, they just happen to trade on the exchange. If we extend this topic a bit, do you know that Real Estate Investment Trusts (REITs) are funds too?

They are all in the form known as a “Collective Investment Scheme”, which is the formal name of unit trusts. A Unit Trust is loosely used in Singapore and often misunderstood. It is just a structure where you own a unit of a collective investment which is held in a trust structure.

People tend to believe the narrative that an ETF is superior merely because of the stated cost. But is it really true?

The ETF industry did an excellent marketing campaign to “externalize” the real cost of investing with them. They compared the net fees of their own products with the gross fees to transact in other products.

I will now go into some technicalities, but the conclusion (in layman’s terms) is that you don’t necessarily save the cost by using an ETF versus investing with a unit trust in the Singapore context.

You see, when you buy an ETF through a Robo-adviser, you need to pay a stock brokerage fee, the SGX clearing fee, and GST. How much is charged? It is silent on StashAway’s website, where only the management fee is mentioned. (If you have the answer, please comment below.)

But the real significant cost is the “slippage”. It means you get a different price than expected on an entry or exit from a trade. For example, the value of an ETF is $1, but you may end up paying $1.02 for it, losing 2% upfront.

Can it happen? Of course.

When you top up your investment account, a Robo-adviser has to make a purchase on the same day, so it has to be a market order. And this gives other players in the market a golden opportunity to “take advantage of you”.

In fact, the same thing can happen for ETFs., where market participants may “front-run” the ETF managers just before the rebalancing date. (It is a bit complicated, so I will leave it to another day’s post.)

This is not a big issue in the US market because the ETFs which the Robo-advisers use are highly liquid. But for SGX listed ETFs, you’ve got to be very careful. Let me give you an example.

Below is the chart for the Nikko AM SGD Investment Grade Corporate Bond ETF.

Nikko AM SGD Investment Grade Corporate Bond ETF price volume chart – Source: ShareInvestor.com

Let me highlight something in this chart.

  • On May 31, 2019, 2.1 million shares were transacted, but the share price was in a tight range between $1.016 and $1.017.
  • On July 16, 2019, only 3,000 shares were transacted, but the price opened at $1.04 and dropped back to $1.027.

My speculation is that the difference is because one is an institutional trade and the other is a retail trade. Maybe, on July 16, someone woke up and said, “My friend says the NikkoAM SGD IG Bond looks good, let me call my broker to buy some today”, and he or she just got “eaten” by the financial sharks.

(How can 2.1 million shares be transacted without affecting the market price? I will talk about it in a future article. Subscribe my blog for future updates.)

If this is not enough to convince you, it is interesting to see another chart showing the iShares Asia High Yield Bond ETF last week.

On Sep 13, 7,900 shares were transacted. Someone paid $17 when the market opened while the fair value was only around $10.40 on that day (a whopping 63% loss for the investor on that day). It’s your guess who would have done that.

iShares Asia High Yield Bond ETF price volume chart – Source: ShareInvestor.com

You can also observe similar things happened in my article about Astrea retail bonds.

Is there a better way to build a diversified SG ETF income portfolio?

Since the day I started as an independent financial adviser, I had wanted to build an SG focused income portfolio for my clients. However, as a practitioner who manages and invests real money, I knew there were great hurdles.

But if you look at the list of ETF providers, you may notice that Nikko Asset Management is a key player in Singapore. That is why I contacted them some time back with a proposal. I said, “With all the institutional muscles and the ETFs which you have, can you put them together as an easy to access, low-cost portfolio for retail investors?”

And I am grateful that they did consider my feedback and have launched a new product called “MyHome Income”. Unfortunately, they did not run any marketing campaign for this, so let me elaborate a bit (this is NOT a sponsored post).

This fund has a very similar concept of StashAway’s SG Focused Income Portfolio. But it is in the form of a fund rather than buying the ETFs individually. The fund invests in 4 ETFs in the following manner.

The advantage is that being the ETF providers themselves, they can execute this strategy in a much more cost-efficient manner. At the same, they can handle large transactions without the “slippage” that I mentioned earlier. If you have confidence in Singapore’s financial markets (stocks, REITs, bonds), this is the best solution in my opinion.

I want to see how many people are interested in this solution. If you think this makes more sense, subscribe my blog below or leave your comment and I will update you when this product is available in the market.

About the Author

Ivan Guan is the author of the popular book "FIRE Your Retirement". He is an independent financial adviser with more than a decade of knowledge and experience in providing financial advisory services to both individuals and businesses. He specializes in investment planning and portfolio management for early retirement. His blog provides practical financial tips, strategies and resources to help people achieve financial freedom. Follow his Telegram Channel to join the FIRE community.
The views and opinions expressed in this article are those of the author. This does not reflect the official position of any agency, organization, employer or company. Refer to full disclaimers here.

  • I totally agree that no one should be buying funds through the bank with their high commissions, but there are still many “uncles” and “aunties” out there giving up their hard earned cash to the bank RM. They are usually at the banks to put a FD after saving up for years, and will always be persuaded by the officers to put into endowment plans or some unit trusts/funds. I know it happens frequently from accounts by older folks I meet, as well as when I observe the interactions between officers and the older folks inside the banks.

    I tried to persuade the older folks not to buy from the banks, but their responses are they don’t know how to go online or use the internet to buy. most don’t even have a computer at home. Those with older parents should watch out and not allow them to go to the banks on their own, It’s hard for them to say no to the very friendly and nice officers (I am not saying only old folks are susceptible, most of us find it hard to say no to sales tactics just think of spa packages for the ladies! lol).

    Basically they are scared/ignorant of technology. I wish there was some way to help improve their financial and online literacy (more so as they are usually blue collar workers who have managed to save up some hard earned cash). Otherwise the group that can least afford to pay high fees usually end up paying the most. What an irony.

    • Hi, Elsie,

      I agree with you. Old folks have inherited trust in the banks with historical reasons and banks often abuse that trust.

      And you are right that they feel that there is nobody else that they can turn to. The issue is that the financial advisory industry has lost its trust with the public. Financial advisers are often viewed as salespeople and people rather ask questions in an online group or forum than sitting down to discuss with an adviser.

      There are good independent advisers out there but the public cannot distinguish the differences. Whether you are an insurance agent, a bank RM, an insurer-owned independent adviser or an independent adviser, you are all called a financial adviser.

      That is why I hope through this blog, people can see things differently and rebuild the trust of the financial industry.

    • Hi, Ami

      Nowadays, you can buy almost any fund which the banks are selling at an independent platform without paying commission. The bank is just acting as an intermediary. Whatever upfront fee you pay goes to the bank, not the fund manager.

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