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Thursday, 13 March 2008

I bought STI ETF on 5th March 2008


STI ETF is basically a minimally managed fund designed to track the STI index. Simply put, it is meant to mirror the market returns, not to beat it. More of it can be found in the following link.

Motivation behind the purchase

I bought the STI ETF using CPF instead of cash. My main reason was to beat the impending freeze on the first 20K of my CPF ordinary account on 1st April 2008, by diverting the idle funds to something more worth while. With more than 20 years before I turn 55, I am quite confident the ETF can give a better return than the risk free CPF interest rate of 3.5% (for the first 20K at least).


(The following table is computed with closing prices on Friday, 15th March 2008)

*P/B ratio uses Net Asset Values (NAV) which includes non-tangible assets

By right, I'm supposed to do a full fledged valuation of each STI component that is equivalently represented in the ETF. By left, its too tedious if I'm just going to treat ETF as a idiot-proof, black box investment vehicle.

Hence, I simply calculated the weighted average Price-to-Book, P/B (estimated with Price-to-NAV) and Price-to-Earning, P/E ratio of the STI ETF basket of stocks. The values are taken from Shareinvestor to simplify and shorten the data mining process.

The weighted average P/B is 3.84 and P/E is 16.42.

For good business with good business prospects and run by good management, I had a set of self imposed criteria before further effort is dedicated for more thorough analysis.

My rule of thumb for P/B ratio is:
  • P/B less than 2 implies chances of undervaluation
  • P/B between 2 and 3 indicates possible fair valuation
  • P/B more than 3 probably indicates over valuation, anything above 5 possibly means grossly overvalued
My rule of thumb for P/E ratio is:
  • P/E less than 10 implies chances of undervaluation
  • P/E between 10 and 20 indicates possible fair valuation
  • P/B more than 20 probably indicates over valuation, anything above 50 possibly means grossly overvalued

I assume STI components, which are blue chips, to be classified as "good business" and hence subjected them to my rules of selection criteria. The conclusion, on the surface, is that its possibly fairly valued at current level, i.e. after several months of "correction" from a high of 3906.16, STI is still not willing to market itself with a discount.


On the basis of beating the impending CPF freeze and blind faith on the companies that can make it into the STI, I might just justify my purchase of STI ETF.

But according to the basic principles of value investing, i.e. margin of safety and diversification, I failed to meet the former.

Whether or not I'm right at this juncture, I'll know it in 20 odd years time when I turn 55.



Anonymous Anonymous said...

Hi Market Uncle,
Wonderful blog,very informative. Do keep up the good work!
Can I just inquire in getting the calculated P/E data etc from shareinvestor, what membership rank/fee/type do you have to register under? Thanks.

11 April 2008 at 22:16  
Blogger Market Uncle said...

You can try the jade membership for a fee. It comes with basic data and forum access on shareinvestor.

Alternatively, you might want to consider DBS Vickers, which is free. The Stock filter, Clarity, is very good.

12 April 2008 at 14:43  
Blogger la papillion said...

Hi market uncle,

Quite some time since I've visited your blog.

It happened that I saw you posting on cna forum, and went to you site. Surprised to read this article where you bought STI etf.

I just did an article on it today, so perhaps if you've time, you can take a look.

5 May 2008 at 23:00  
Blogger la papillion said...

Sorry, realised the link can't be seen. It's:

- just join the links up with no spacing

5 May 2008 at 23:02  
Blogger Alan Teoh said...

hi market uncle

interesting read. i have got two questions:

1) if short term view are bearish on the index, can we short the STI ETF? if yes, how long we can leave the position open?

2) or is the above prohibited like shares trading, can short only within the day but must buy back before market close?


11 May 2008 at 06:38  
Blogger Market Uncle said...

Hi Alan,

I'm knew very little about shorting, so don't think I can answer much. If I'm not wrong, STI ETF is just like any other stock trading on SGX. Shorting it and buying back in one day should be fine. Anything longer, I'm not aware.

11 May 2008 at 18:17  
Anonymous Anonymous said...

Hi Market Uncle,

I did a check on the PE ratio. Instead of using share investor, i used the trailing PE ratio of each company and weighted each company by PE, as of August 12, 2008 prices, the weighted average PE was 27.34.

Thought i will let you know.



13 August 2008 at 14:55  
Blogger Market Uncle said...

27 seems a little high. Care to share how you weighted average them?

Looking across the various components at first glance, only OLAM, Sembmarine and Wilmar had p/e exceeding 30s, most of the rest are all in the mid teens below 20.

13 August 2008 at 23:03  
Anonymous Anonymous said...

Sorry Market Uncle, rookie mistake of averaging by # of shares, terribly sorry, when one averages by value of shares, the PE ratio is 12.61. PTB is 3.54, using the same value weighted average method



14 August 2008 at 11:14  
Blogger la papillion said...


I realised that the new sti is not only value adjusted, it's float free adjusted too.

You can read mike's excellent post on sti PE calculation:

It's only 6.91x.

7 September 2008 at 23:03  
Blogger Mike Dirnt said...

hi guys. i have computed the PE ratio in my blog. the PE ratio is at 9.08 as of 2 Sep.

im not sure how accurate it is but i strongly believe the data are ok. see if you can spot anything wrong in the excel data

8 September 2008 at 00:15  
Blogger Market Uncle said...

Hi Mike Dirnt,
Great work! Utterly impressed.

While 9.08 might seem low, your data seems pretty ok. But as you've said it, we can double check with the ifast report.

By the way, the overall p/e for the index is a useful to guide to do a litmus test for the localised market in general, hence I'm not so particular in getting it "right".

So, capitalisation for weightage will do just fine.

8 September 2008 at 22:00  
Anonymous Penny Stock Investing said...

Their are always great value stocks in every market anywhere in the world you just have to take the time to find them.

12 December 2011 at 14:38  

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