On Jan 29, the world’s longest-surviving exchange-traded fund — initially known as the Standard & Poor’s Depository Receipt (SPDR) — celebrated 30 years since it began trading. It is now among the largest funds in the world and, on some days, the most heavily traded security anywhere, says Tim Edwards, managing director of index investment strategy at S&P Dow Jones Indices.
Based on data compiled by S&P Dow Jones Indices between Jan 29, 1993, and Sept 30, 2022, just 2% of actively managed Large-Cap Core funds beat the S&P 500. Edwards attributes this at least partially to fees.
“The higher fees typically charged by actively managed companies may be part of the reason that so many funds underperformed, although other factors may also have been at play,” he says in a note dated Jan 11 this year.
Index funds and ETFs also charge fees, but — once again, based on available data — the performance of these index funds and ETFs would not be significantly different from their “underlying” indices net of fees. As an indication, SPDR S&P 500 had an initial fee of 0.2% a year, which was reduced to just under 0.1%.
“Even among surviving funds — which we might well suppose generally performed better — 57% of domestic funds underperformed the S&P 500 by more than a percentage point per year,” adds Edwards.
Anu Ganti, senior director of index investment strategy at S&P Dow Jones Indices, says investors have benefited substantially by saving on fees and avoiding active underperformance.
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“We can estimate the fee savings each year by multiplying the difference between the average expense ratios of active and index equity mutual funds by the total value of indexed assets for the S&P 500, S&P 400 and S&P 600. When we aggregate the results of these annual computations, we observe that the cumulative savings in management fees over the past 26 years is US$403 billion,” Ganti writes in a note dated Oct 18, 2022.
Separately, entities such as corporates and REITs are keen to upgrade their governance, financial and liquidity requirements to gain entrance into major indices tracked by ETFs. Hence indexing can raise standards in emerging and other markets.
The first ETF was listed on the Singapore Exchange in 2002 — the SPDR Straits Times Index ETF. While ETFs listed locally — around 57, give or take — have gained some traction and a moderate following over the years, they are not as well traded as stocks.
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The most liquid and followed ETF is the Lion-OCBC Securities Hang Seng TECH ETF (HSTECH), priced in Singapore dollars. It replicates the performance of the Hang Seng TECH Index. Hence, its largest constituents at the end of November 2022 are Xiaomi Corp, Tencent Holdings, JD.com, Meituan, and Alibaba Group Holding. Netease and Semiconductor Manufacturing International Corp, or SMIC, are among the top 10. Other household names in the index are Lenovo, Baidu and Trip.com.
Technically, HSTECH retreated in the first two weeks of February due to a build-up in overbought pressures by short-term indicators. This is alleviating. In the meantime, the 50-day moving average has crossed above the 200-day moving average in a positive move leading to support appearing at 72 cents. Resistance is at 78 cents, and a breakout would indicate an upside target.
