This is our new series where we compare CPF against other financial assets.
Today, we are comparing CPF SA against the Nikko AM Singapore Straits Times Index (STI) ETF (G3B.SI).
If there are other assets you would like us to compare against next, let us know in the comments below.
CPF Assumptions:
- From Feb 2009 to Dec 2019 $100 is contributed into CPF via the Retirement Sum Top Up Scheme (RSTU).
- The money earns 4% p.a. interest and the extra CPF interest is excluded for simplicity sake. In reality, the CPF returns would be higher than what is calculated due to the extra bonus interest (up to 6% in total).
- From Feb 2009 to Dec 2019, $100 is contributed into a Regular Shares Savings (RSS) plan every month to buy STI ETF (G3B.SI).
- Shares are bought at the end of the month closing price and the plan charges a 0.88% transaction fee (OCBC Blue Chip Investment Plan).
- Money uninvested will be refunded back to your bank account.
- Results include both dividends reinvested and not reinvested into the ETF.
Since the creation of the Nikko AM STI ETF on February 2009 to 31 December 2019, it has returned 4.20% p.a. (dividends reinvested) and 4.27% p.a. (dividends not reinvested).
This is higher than the 4% return given by CPF.
Out of 131 months, less than 30% of the time did CPF had higher balances than the STI ETF portfolio value.
Over the long-term, it seems that the STI ETF is a better investment than CPF, although it comes with short-term volatility and periods of underperformance.
Conclusion:
The goal of investing is to increase wealth over the long-term.
The Nikko AM STI ETF is able to grow at rates above the 4% p.a. given by CPF.
However, CPF pays up to 5% p.a. interest on the first $40,000 CPF SMRA balance.
In that case, it might be better for you to top up money to your CPF account until your SMRA balance reaches $40,000.
Then after that invest your money in STI ETF.
That should maximise your long-term returns.
Recommended Read: 8 Years of Investing: How a Hedge Fund Manager Wannabe Became Just Another Singaporean
Side Note:
Did not compare rolling 5-year periods
There are a total of 72 rolling 5-year rolling periods from Feb 2009 to Dec 2019.
Because of my laziness to compute the rate of return 72 times, it is not shown.
However, if you have a way to use Excel to calculate the rolling rate of return via XIRR, please let us know.
We will work on the calculations and publish it for you.
Did not compare rolling 10-year periods
We ignored the 10-year rolling results because the life of the Nikko AM STI ETF is not significantly long enough to make any 10-year rolling results meaningful.
From Feb 2009 to Dec 2019, there are 12 rolling 10-year periods, and they all fall in the year 2019.
Tax benefits with topping up to CPF SA via RSTU
Every dollar you contribute into your CPF via the RSTU is eligible for a tax deduction - if you haven't maxed out your tax deductions.
So you'll get tax deductibles of $1,200 per year based on the above scenario.
However, if you need money, you can't withdraw it from CPF.
For investing in STI ETF, there is no tax benefit associated unless you contribute that $100 into your Supplementary Retirement Account (SRS), and then build your RSS with the money that's in your SRS.
However, if you need money, you can sell the STI ETFs and get back cash.
However, if you withdraw before your retirement age, 100% of the amount withdrawn will be subjected to tax.
Different performance result from the ones shown by Nikko AM
The difference stems from the investment period.
In our case, we use Dollar-Cost Average (DCA), buying the ETF every month.
Nikko AM case, it is calculated from an investment at the beginning of the fund (lump sum investing).
Uninvested money returned to your bank account
If the ETF was trading at $3.10, only 31 unit of ETF would be bought, which translate to a cost of $96.95 ($3.10 x 31 units + 0.88% commission).
That results in $3.05 going back into your pocket.
STI ETF (G3B.SI) performance without fees
When fees are excluded (though not realistic), the performance of STI ETF increased by about 0.2%, to 4.38% p.a. (dividends reinvested) and 4.44% p.a. (dividends not reinvested).
Disclaimer:
Do not make any investment decisions based upon materials found on this website.
Investment Stab is not a registered investment advisor, broker-dealer, and am not qualified to give financial advice.
Investors are reminded to do their own due diligence and invest according to their risk appetite.
As we progress towards the next phase of our journey, we would like to find out what would make you like us even more.
So we hope you could help us fill in a short survey of 8 questions (4 of them are MCQs) so that we can help better tailor our content to you.
Survey
WSG can provide you with a career coach that can help you with that.
And if you are looking for a free career coach, visit Workforce Singapore via the link below.
They can link you up with the career coach and you
might be able to find new opportunities on their jobs portal.
Recommended Read: The 4% Shortfall In Your CPF Retirement Fund
Remember to offer your opinions. If you don't put your two cents in, how can you expect to get change?
I dont see CPF funding available for OCBC BCIP (only Cash and SRS), may I know if you've verified if you've verified that it's valid?
ReplyDeleteHi
DeleteWe did this comparison between CPF RSTUS and OCBC BCIP.
Like if you had cash, should you put into CPF RSTUS or STI ETF via OCBC BCIP.
We didn't meant you could use CPF money for BCIP.
Sorry for the confusion it caused.
But we would like to know which part made you thought that? :)