Are Singapore ETFs Back on Track?

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Southeast Asian economies have a long tradition of attracting investors from all over the globe. This is because many countries here are attractive destination for both domestic and foreign investors thanks to solid growth rates, booming population and generally good governance when compared to other emerging regions.

Unfortunately though, troubles are flaring up here of late, especially in the Philippines, Thailand and Indonesia. However, Singapore – the business center of Southeast Asia – is seemingly recovering from the twin attacks of slow growth and heightened inflation (read: Can Anything Stop These Soaring Southeast Asia ETFs?).

The nation has shown a surprise jump in its economic growth in the second quarter this year after slow growth over the last two years. The economy grew 3.7% year over year in the second quarter aided by an unexpected surge in manufacturing and growth in the service sector. The manufacturing sector bounced back with 1.1% growth against the 6.9% contraction in the previous quarter.

Incredible GDP Growth

According to advance estimates from Singapore's Ministry of Trade and Industry, GDP grew an annualized 15.2% on a seasonally adjusted quarterly basis. This marks the strongest growth in over two years and is nearly double the market expectation growth of 8.3%.

This data suggests that bad times might be over for this nation which now looks back on track. The country, which is often overlooked by many American investors, is considered a good bet at present as low inflation (1.6% in May), impressive unemployment (mere 1.9% in the first quarter of 2013) as well as heightened business activities in the Asia Pacific region made it a compelling choice for investment.

The country remains an important business hub in the region, and its safety and business protection are unmatched across Southeast Asia. Furthermore, the country's central bank reiterated its outlook of 1%–3% for GDP growth for 2013. The central bank also slashed its inflation forecast for 2013 to the range 3%–4% from 3.5%–4.5% predicted previously.

Being a trade dependent economy, Singapore’s growth is vulnerable to the declining exports to Europe, Asia and the U.S. So, a sharp slowdown in China's economy, continued weakness in Europe and the imminent winding down of the massive U.S. economic stimulus measures would remain the major headwinds to exports and economic growth in the second half of the year (read: 3 European ETFs Holding Their Ground).

How to Play Singapore

We expect that most of these headwinds will not materialize into big of issues for the island nation. Plus, the country is somewhat of a safe haven compared to others in the region, so it could see inflows even if the rest of the area is struggling, making Singaporean investments a good pick.

Currently, investors have three ways to play the Singaporean economy in ETF form. While these funds appear somewhat similar, investor should bear in mind their key differences, which we have highlighted below:

iShares MSCI Singapore ETF (EWS)

This ETF tracks the MSCI Singapore Index which looks to give investors broad exposure to the Singaporean stock market with a focus on large caps. The product has amassed $1.3 billion in its asset base and sees good volume of more than 1.7 million shares a day. The ETF charges investors 50 basis points (bps) a year in fees.

In total, the fund has 31 stocks in its portfolio and is relatively concentrated in its top securities. The top three companies account for about 35% of total assets and include Singapore Telecom, United Overseas Bank and Oversea-Chinese Banking Corp.

In terms of sector exposure, EWS is tilted towards financial as these make up for more than half of the assets alone, followed by industrials (19.9%) and telecommunication services (13.5%).

EWS lost about 2.85% year-to-date but has added about 4% to start July, suggesting it may now be back on track. In addition, the fund yields a solid 4.41% in annual dividends. The ETF currently has a Zacks ETF Rank of #3 or ‘Hold’ rating (read: Zacks ETF Rank Guide).

iShares MSCI Singapore Small Cap Index Fund (EWSS)

For investors looking for pint sized securities based in Singapore, EWSS could be an interesting pick. The product is less popular and illiquid, with $23.4 million in AUM while its volume is quite light suggesting wide bid/ask spreads.

EWSS holds 78 securities, doing a pretty solid job of spreading out assets among the top components. Much like its large cap counterpart though, the fund has a great deal of exposure to the broad financial/real estate sector as REITs make up more than 46% of the fund. This gives the product a pretty hefty level of concentration into one sector (read: Time to Worry about Singapore ETF?)

The fund charges 59 bps in fees per year from investors. EWSS lost over 2.5% year-to-date. But so far in July, the ETF has given a solid performance, adding about 1.60% in the time frame. The product also pays a solid yield, suggesting it too could be an income pick. Currently, the ETF has a Zacks ETF Rank of #3 or ‘Hold’ rating.

CurrencyShares Singapore Dollar Trust (FXSG)

The product looks to track the price of the Singaporean dollar, net of expenses, which is 40 bps a year. The currency is controlled by the Monetary Authority of Singapore (MAS), the nation’s central bank.

The ETF looks to provide long exposure to the Singaporean dollar, appreciating when the currency goes up against the U.S. dollar, and down when Singapore’s dollar declines against the American currency (read: Inside The Only Singapore Dollar ETF (FXSG)).

However, investors should note that the product is still quite young (having debuted in February this year) having accumulated only $7.9 million in its asset base and trading in a paltry volume of below 3,500 shares per day, indicating a wide bid/ask spread. FXSG is up 0.5% so far in July but lost 2.2% since inception.

Bottom Line

Though Singaporean stock prices faced severe weakness earlier in the year, the recent rebounding signals that the growth story in Singapore is not over yet. This is especially true given the incredible growth rates for the nation in the second quarter, and the strong outlook for the nation in the months ahead as well.

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Read the analyst report on EWS

Read the analyst report on EWSS

Read the analyst report on FXSG

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