- RSS Plans provide a means for investors to build gradual STI exposure. Such a monthly plan on an STI ETF from May 2013 to April 2018 generated an indicative return rate of 7.9% p.a. excluding transaction fees, as of the 22 May close.
- RSS Plans utilise dollar cost averaging. Over the five year period, dollar cost averaging on an STI ETF meant that approximately two-fifths more units were bought at month-end lows in January 2016, compared to month-end highs in April 2018.
- There are currently more than 50,000 active RSS Plans in Singapore. Providers of RSS Plans on the STI ETF and a selection of stocks include Phillip Capital, OCBC Bank, POSB and Maybank Kim Eng. More information can be found here.
Two popular methods of investing the Straits Times Index (STI) in its Index form, are Exchange Traded Funds (ETFs) and Regular Shares Savings Plans (RSS Plans).
The first Straits Times Index (STI) ETF listed 16 years ago in April 2002, which has since generated a 225.8% total return from inception through to the 22 May close. The second listed ETF to track the STI, the Nikko AM STI ETF (which debuted near major market lows in February 2009) has since generated a 170.7% total return for investors.
RSS Plans provide an alternative means for investors to build gradual STI exposure, and make use of dollar cost averaging with performance measured by internal return rates. There are four providers of RSS Plans in the Singapore market.
The four providers are:
- Phillip Capital (launched in February 2002);
- POSB and OCBC Bank (which both launched in mid-2013); and
- Maybank Kim Eng, which launched in early 2015.
The RSS Plans are available on both the STI ETFs, in addition to certain SGX-listed stocks. There are currently more than 50,000 active accounts with RSS Plans in Singapore. More information can be found here.
The five year history of the STI is illustrated below. The two annotations overlay yesterday’s close price for the Nikko AM STI ETF at S$3.67 per unit, and the Nikko AM STI ETF price in the third week of May 2013 at S$3.44. Note the April 2018 month-end close price of the Nikko AM STI ETF was S$3.71.
Five Year Price History of the STI
Dollar cost averaging commits a fixed amount of dollars to invest each month, rather than a fixed amount of units (or shares in the case of stocks). This effectively means that the Investor would have purchased more units at market lows and less units at market highs.
For instance applying month-end STI ETF prices, and a fixed amount of S$1,000 at the end of every month, the Investor would have:
- purchased 373 units of the STI ETF in January 2016 when the units were priced at S$2.68; and
- purchased 268 units of the STI ETF in April 2018, units were priced at S$3.71.
This means that the investor purchased approximately two-fifths more units in January 2016, near market lows, than in April 2018 near market highs.
The chart below illustrates indicative units that would have been purchased on a RSS Plan on the Nikko AM STI ETF from the end of May 2013, through to the end of April 2018. The example also assumes S$1,000 monthly deposits and investments made at month-end Nikko AM STI ETF prices, which means a total of 60 monthly investments were made over the five year period.
Note this dollar cost averaging example and discussions on return rates below is for educative purposes only and does include transaction fees.
Internal Rate of Return
Like a mortgage, investments are spread over time with dollar cost averaging, hence the traditional measure of Return on Investment (ROI) is less relevant for the RSS Plans. For instance, applying 60 months of S$1,000 investments on the STI ETF would have generated an indicative ROI of S$13,361, which represents a 22.3% return on the summed monthly investments of S1,000 which totalled S$60,000. In this example, the monthly S$1,000 investments that spanned May 2013 to April 2018 at month-end Nikko AM STI ETF prices, are valued at the ETF’s closing price of S$3.67 yesterday.
The 22.3% return also includes all dividend distributions of this ETF that went ex-dividend between 1 June 2013 and 28 April 2018. The most recent distribution went ex-dividend on 2 January 2018 which is included in the indicative returns. As noted above, these examples exclude transaction fees.
For dollar cost averaging, S$60,000 is not the relevant base for computing returns. The base started with S$1,000 and has been variable albeit consistently growing by S$1,000 each month. Common investing logic means that it would be much easier to make S$13,361, starting with S$60,000 back in mid-2013, than it would be to make S$13,361 starting with S$1,000 in mid-2013. Hence for RSS Plans, the Internal Rate of Return (IRR) can be used in place of the aforementioned ROI.
IRR simply compares the equal monthly instalments to the current value of the portfolio and computes an annualised return that would have been necessary to achieve the current portfolio value. Hence based on equal monthly payments of S$1,000 over the past 60 months, and the current portfolio value, the RSS Plan on the Nikko AM STI ETF would have had to achieve a 7.94% annualised return.
Hence this is a return rate, in addition to a indicative return because the portfolio value is based on month-end STI ETF prices. Please also note the POSB and OCBC Bank RSS Plans came into effect after May 2013.
Had this STI ETF closed at S$3.00 yesterday, the IRR would have been a rate of return of 0.6% p.a. Hence, market risk is still an inherent part of an RSS Plan, albeit considered to be less than lump-sum investing due to the dollar cost averaging.