Singaporeans—Beware of high cost index funds!

Two twin Singaporean brothers earn university degrees and prepare themselves for the workforce.  And their family gives them each a $20,000 gift for them to invest.

These boys are smart.  Off they head to the bookstore to read up on investments, and after spending a full day at Borders, sifting through free books (they’re frugal lads too) they come to a conclusion that index funds give the highest chance of long term statistical success, compared to unit trusts.

Sure you can find unit trusts that have historically beaten the indexes, but funds that tend to beat the indexes during one time period generally revert back to losing to the indexes in the following period.  You can read more about this here:  or with Princeton University’s Burton Malkiel, here

The two brothers walk out of the bookstore, keen to buy  index funds.  But there lies the danger.  If they aren’t careful, they can be sold a very expensive product, under the guise of a low cost index fund.

Look no further than the indexed products available through the Infinity Investment Series, via Fundsupermart.  They’re fine for investors under the age of twenty-one, but make little sense for older investors.

They sell, for example, a U.S. market S&P 500 index fund charging 1.04% annually (as an expense ratio) and a 2% front end sales fee to make the purchase.

Let’s assume that one of the brothers takes this option, while the other chooses to go with Vanguard’s low cost S&P 500 exchange traded index fund, costing just 0.09% annually. 

Before fees, each fund would make the same return because they track exactly the same market.  But the index purchased through Fundsupermart costs 955% more, annually (it’s more than nine and a half times the cost)

Costs given in tiny numbers—like 1.04%—look minimal.  But they’re not.  If the U.S. S&P 500 index makes 5% per year for the next 5 years, an investor paying “just” 1.04% is giving away nearly 21% of their profits to the fund company reaping the benefit.

Let’s examine those 2 brothers again:

  Brother 1 Brother 2

$20,000 given to each brother to invest for 35 years

Brother 1 invests in an S&P 500 index fund via Fundsupermart costing 1.04% annually

Brother 2 invests in a Vanguard S&P 500 exchange traded fund via DBS Vickers costing 0.09% annually

Assume an 8% return for the S&P 500 index for the next 30 years

Brother 1 makes 6.96% annually after expenses

Brother 2 makes 7.91% annually after expenses

How much will each brother have after 35 years?

Brother 1 will have $210,755.44

Brother 2 will have $287,203.17

After 40 years, assuming the same rate of return?

Brother 1 will have $295,043.30

Brother 2 will have $420,240.29

After 45 years, assuming the same rate of return?

Brother 1 will have $413,040.59

Brother 2 will have $614,902.36

It’s hard to imagine that the true cost of “small fees” can amount to more than a $100,000 difference on just a $20,000 investment. 

Think about what the difference would be on larger invested sums. Costs matter.  They really do matter.

To read how to create a diversified low cost portfolio of cheap indexes, please read this post: 

 

 





Andrew Hallam

I’m a financial columnist for Canada’s national paper, The Globe and Mail, as well as for AssetBuilder, a financial service firm based in Texas. I’m also the author of Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School (2nd Ed. Wiley 2017) and The Global Expatriate’s Guide To Investing: From Millionaire Teacher to Millionaire Expat (Wiley 2015). My mission is to educate, motivate and inspire people on basic retirement planning and best practices for investing, using evidence-based strategies. I’m happy to comment on your questions. However, please read the Terms of Use, Privacy Policy and the Comments Policy.

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20 Responses

  1. DIY Investor says:

    I looked at the Fundsupermart site from your previous post and was amazed at the charges for all the funds. In the U.S. load funds are still offered in some 401ks! People's retirement is being taken from beneath their very noses!

  2. @DIY Investor

    Robert,

    I agree. A Singaporean local blogger also found that when they compared 5 Singapore market funds to the Singapore index, the reported index return didn't include dividend distributions. Robert, is it common that fund/marketing companies would do that? It doesn't seem fair.

  3. DIY Investor says:

    Andrew,

    In my experience it hasn't been common but I have seen it done. You are right it isn't fair. I've also seen advisors report results versus the S&P 500 when their model is 70%stocks/30% bonds. In 2008 they reported that they did well because they were down 30% and the S&P 500 was down 37%. What the client doesn't know is that 70% in S&P500 and 30% in Aggregate Bond Index would have been down 24%. Thus, the advisor performed horribly!

  4. That is one hefty fee for an index fund. The negative impact of compounded costs makes quite a difference over the typical working life of the average adult.

  5. @DIY Investor

    Hey Robert,

    Friends of mine have "reported" that they "beat the index" according to their advisors, in 2008 as well.

    Then they ask, "Andrew, if we are beating the indexes, then aren't we in better products than the indexes?"

    I try explaining what a diversifed portfolio of indexes is—so they can make more of an apples to apples comparison.

    In any case, I don't think the advisors are always being sneaky. They just might not really know much. Your thoughts there?

  6. @The Biz of Life

    Hey Biz,

    There's also a 2% sales fee to get into that thing. Selling an index with a 1.04% expense ration and charging a 2% upfront sales fee is surely praying on ignorance isn't it?

  7. It's more difficult to visualize and assess unseen costs over seen costs. You see that a fund "costs" 1%, but what you don't see is that that same 1% can cost you more than $100,000 over the years.

    People need to educate themselves and be educated. False advertising should be punished. And finally… your pamphlet should be distributed to every graduate, ready to work and start spending and saving! If a few advisors can no longer drive Mercedes, what's the loss? These guys by and large are a drag on society and on productivity.

    You know I'll go back into a tirade about sound money, because with sound money cash would be a much better investment and there would be much less of a need to give these guys jobs. In fact, the fiat monetary system is a welfare scheme for Wall Street if you look at things that way.

    If I had a dollar today that could buy a loaf of bread and I knew it would also buy a loaf of bread in 40 years from now, that would be a much sounder dollar than the dollars in my wallet. In fact, one would expect my dollar to buy two loafs of bread as production costs tend to decline over time. Maybe that would be the ultimate type of index fund, though there would still be a place for the markets. I just think that without all of the false low-hanging fruit, it would be a *somewhat* more honest place than today.

    In the meantime, keep on cranking out the great posts, Andrew! We can't change the world overnight, but we can certainly change it, a few lives at a time.

  8. Kwa Chia Rhun says:

    We kinda don't have a choice. Almost all mutual funds (we call them unit trusts here) are very expensive by US standards. Many equity funds charge more than 2% in annual expenses. That fund you profiled, the Infinity index fund, is actually one of the cheapest equity funds available in Singapore to retail investors. To my knowledge, it is beaten only by the DBS Shenton Thrift fund, a Singapore-only fund, which charges around 0.95% per year if I recall.

    What alternative do we have? To invest in a US-listed ETF, one would need a USD brokerage account. That means paying wire transfer fees, then commissions for buying the ETF. This makes it very expensive if we want to do Dollar Cost Averaging, which is necessary for some of us if we lack the discipline to stockpile cash until there is enough to make the wire transfer fee and brokerage commission inconsequential.

    What's more, buying US-listed ETFs means greater exposure to USD currency risk, does it not? If one is to keep the portfolio in 2 separate baskets – in Singapore for fixed income, in US ETFs for equity, that makes rebalancing a real headache that most people would not want to deal with. Fund distributors like the one you profiled do allow free "trades", making rebalancing much simpler.

    • Kua Chia Rhun,

      Thank you so much for your comment. It's a great comment, and I think that our exchange will help many people.

      Whether you bought a U.S. index through Infinity, charging nearly 1% annually (and a 2% sales commission) versus buying the same ETF product through Singapore's DBS Vicker's brokerage account, you would be taking exactly the same currency risk.

      There would also be a currency spread difference, but through Inifinity, you just wouldn't see it. But think about what you would be buying for a moment, and you'll recognize that there's no way around it. Whether the product is being purchased via Infinity, or as an ETF through Singapore's DBS Vickers, you would pay the same U.S. witholding taxes, and the same currency spread.

      To clarify the above, you don't need to wire your money to the U.S.

      You can make your purchases through DBS Vickers, right here in Singapore.

      Here's a link to what I suggest you can do here: https://andrewhallam.com/2010/10/singaporeans-inve

      I believe that this represents the lowest cost option for Singaporeans.

      Thanks again for your comment. Let me know what you think.

      And please check out Chapter 6, in my book, Millionaire Teacher. It has a special section dedicated to Singaporean investing.

      Cheers,

      Andrew

      • Kwa Chia Rhun says:

        Hmmm. Ok after reading this I went to look at the SGX, and I suppose there are quite a lot more options than when I first made the choice to go with Fundsupermart.

        I do recognize that exposure to USD currency risk is inescapable as long as one invests in any fund that holds US stocks (e.g. Infinity 500). I guess what I meant to say is, it is one less headache for me to just buy units of a fund that is already denominated in SGD rather than have to constantly crunch the numbers every time I want to buy.

        DBS Vickers' charges are still SGD 29 or USD 15 per trade. Thus my last point still stands – buying ETFs with a brokerage account gets very expensive if you want to invest small amounts per month, especially for me, being a new saver at the beginning of my career. With distributors like FSM, I would pay 0.5% front load for fixed income funds and the Infinity index funds, and 1% load for equity funds. So the total blended load I would pay would end up being 0.68%, for a 3-fund portfolio (36% Developed Market Index, 28% SG bonds, 36% Emerging Market actively-managed).

        Were I to replicate this with ETFs (e.g. ABF SG bond ETF, DBXT Emerging Markets, DBXT MSCI World) on DBS Vickers, my brokerage costs would already be $65.58. So I would need to invest at least $9000 at a time or I would be better off using FSM, at least on the issue of transaction costs.

        I could accumulate cash in a money market fund till I hit the threshold amount, but that would be a LONG time on the sidelines given how much I am comfortable with putting away, monthly, for long-term investing. Would that not be a big drag on my portfolio's performance?

        I recognize that the ETFs would be a lot cheaper than the FSM unit trusts in terms of annual expenses. But transaction costs are also very pertinent for new savers with relatively little to invest per month. In Singapore, a comparative investing backwater (amazing to think that in the US there are so many no-load mutual funds), one just has to choose the least-bad option.

  9. You are right in many respects Kwa Chia Rhun:

    I certainly wouldn't dream of buying three ETFs (and paying commissions) in a single month. You could cut your costs considerably if you bought one each month or one every other month. And over your lifetime, such a strategy isn't going to be any more or any less beneficial than dollar cost averaging (every month) into all three indexes at the same time. You have to think of commissions AND expense ratios—with the biggest drag, long term, being the expense ratios.

    I invest regularly, with fairly large monthly sums, but I don't make more than 10 purchases a year. I want to keep transaction costs at a minimum. If you invested $15,000 (U.S. equivalent) a year, and if you made 5 purchases during the year, you would pay roughly 1% in commission fees, using DBS Vickers (assuming $30 U.S. per purchase).

    This is typically much lower than what most of the funds available through Fundsupermart currently charge. And the funds available through Fundsupermart would typically have expense ratios that would be nearly 15X higher than what you would pay through ETFs. And if you feel like just buying a Singapore stock index and a Singapore bond index, you wouldn't take any currency risk at all.

  10. Patrick V. says:

    Hi Andrew, I just finished your book noting the numbers of exampes utilizing Vanguard for obvious reasons. I have much of my money at Schwab. Would it advantageous for me to still purchase via Vanguard or just by index funds within the Schwab offerings?

  11. Teo says:

    Hi Andrew,

    many thanks for this fabulous blog…I am not a blog person but I chanced upon it and never regret reading on this morning.

    I have many things in mind…..many things that I am not doing right / partially right. I hope to consult you later.

    But one thing in mind I wish to ask now is about your advice on the use of Singapore CPF OA fund which is currently paying 2.5% annually and Special Account of 4%. I have resisted to touch my 4% account but took a bit f gamble to use my OA to invest. I am currently 43. My thinking is that with some runway my wife and I have, I can take some risk investing in mainly Asia using OA. I have not done re-balancing for a while and I am certainly not in line with my 2009 plan of 35% US, 25% Europe and 40% Asia .

    Thanks.

    Teo

  12. lim says:

    hi andrew,

    I am looking to start investing. so far, all the advice seems to point towards index funds. I live in singapore, and wonder what index funds do you recommend that doesn’t need a large amount of money to get started? or something that i can contribute to monthly like a savings plan?

    Thanks!

    Lim

    • Hi Lim,

      This article, and the comments that follow, might be helpful: https://andrewhallam.com/2010/10/singaporeans-investing-cheaply-with-exchange-traded-index-funds/

      Cheers,

      Andrew

      • Lim says:

        Hi Andrew,

        I have read through the article you recommended. Nicely written for a noob like me.

        but may i know what’s the difference in buying index fund that is based on the Singapore market or the overseas market? Is there any relevance when choosing the funds based on our location?

        Why is it in part II of the article, you suggested that a 50 years old be having this percentage of funds?
        – 40% in the Singapore Bond index (A35)
        – 30% in the Singapore stock index (ES3)
        – 30% in the world stock index (VT)

        I am currently 28… and i wonder what my percentage would be?

        would it be – 30% in the Singapore Bond index (A35)
        – 40% in the Singapore stock index (ES3)
        – 30% in the world stock index (VT) ????

        what kind of Singapore based index should i be looking at besides those 2 you have suggested? Is there a list compiled somewhere which i should be looking at?

        hope you don’t mind me asking so many questions. i work in the media industry where many people aren’t really interested in this.

        Thanks!
        Lim

        • Hi Lim,

          There’s no easy “one size fits all” answer to your question. In some respects, you could eliminate bonds altogether because your CPF could serve as your bond allocation. If you ignore a separate bond allocation, which you could, you could then focus on just adding to a global stock index (VT) and a Singapore stock index. Keeping adding money to whichever index is lagging (since you start your account) and you’ll be automatically fearful when others are greedy and vice versa. And yes, having a stock index fund that represents Singapore gives you home country bias, which many people shoot for because you will be paying future bills in Singapore dollars.

          Hope this helps. And if you haven’t read my book, you may want to check it out to understand how and why many educated people choose to invest in index funds.

          Cheers,

          Andrew

  13. Lim says:

    hi, I am looking to buying index fund, and recently come across this monthly investing thing. from

    It says it have a 1% charge when buying the funds. (namely Nikko AM Singapore STI ETF)
    Although right now it doesn’t charge a selling fee now, but it charges 1% sales charge monthly.
    Is that a bad deal?

    Cheers.
    Lim

    • Lim,

      For small investable sums, this would work well. The expense ratio of the ETF is low–that’s the most important part. Commission costs are secondary. True, you can buy ETFs with lower commissions in larger quantities, but this is very convenient.

      Andrew

  14. Kahan says:

    Hi Andrew, I’m a Singaporean investor who purchased VT for global exposure in my portfolio and am now hearing from everyone that it’s tax inefficient for non-US investors. They currently comprise 25% and I am wondering if there are other tax efficient global stock ETFs I should consider when I need to re-balance. Your comments would be appreciated.

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