This is part of our new series where we compare CPF against other financial assets.
Today, we are comparing CPF SA against the SPDR Straits Times Index (STI) ETF (ES3.SI).
If there are other assets you would like us to compare against next, let us know in the comments below.
CPF Assumptions:
- From Jan 2008 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 Jan 2008 to Dec 2019, $100 is contributed into a Regular Shares Savings (RSS) plan every month to buy STI ETF (ES3.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.
Comparison
From Jan 2008 to Dec 2019, SPDR STI ETF has returned 4.58% p.a. (dividends reinvested) and 4.62% p.a. (dividends not reinvested).
This is higher than the 4% return given by CPF.
Out of 144 months, almost 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 SPDR 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.
Of course, past performance is no indication of future results.
The SPDR STI ETF may in the next 10 years underperform the fixed returns given by CPF SA.
Also, if you have no stomach for volatility, and is risk-averse, then maybe CPF SA might be a better retirement plan for you than the SPDR STI ETF.
Recommended Read: The 4% Shortfall In Your CPF Retirement Fund
Side Note:
Did not compare rolling 5-year periods
There are a total of 85 rolling 5-year rolling periods from Jan 2008 to Dec 2019.
Because of my laziness to compute the rate of return 85 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
There are a total of 25 rolling 10-year rolling periods from Jan 2008 to Dec 2019.
Because of my laziness to compute the rate of return 25 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.
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 SPDR STI ETF
The difference stems from the investment period and method.
In our case, we use Dollar-Cost Average (DCA), buying $100 of the ETF every month.
SPDR case, it is calculated from an investment at the beginning (Jan 2008) of the fund (lump sum investing).
SPDR STI ETF started in April 2002.
However, we were only able to get price data from Jan 2009 to Dec 2019.
We were unable to find price data from April 2002 to Dec 2008.
If you have the data for the missing period, do send it to us.
We will be able to build a more complete analysis of SPDR STI ETF and share it back with you.
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.
OCBC Blue Chip Investment Plan Fees
OCBC Blue Chip Investment Plan does not include SPDR STI ETF (ES3.SI) as one of the counters available for investment.
However, for consistency with our other comparisons, we decided to stick to the 0.88% in fees charged by OCBC.
In reality, the transaction fee charged by other brokerage firms to invest in SPDR STI ETF via a Regular Shares Savings plan might be higher than the 0.88%.
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.
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Recommended Read: Save in CPF or Invest in Nikko AM STI ETF?
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The CPF interest of 6% is for Retirement Account (RA), and will not be applicable since you are on the topic of RSTU (no "S" at the back) because RSTU is only for Special Account and only up to the Full Retirement Sum (FRS).
ReplyDeleteCould you also share how you get the "cumulative contribution over the years" for the ES3? Shouldn't it be the same as $14,400 since we are talking about monthly $100 contributions.
Hi Buaytuckchek
DeleteThanks for pointing out on the RSTU mistake 😉.
As for the cummulative contribution.
For CPF, it is 144 months of $100, hence it is $14,400
For ES3 dividends not reinvested, because $100 cannot be translated 100% into STI ETFs. There will be some cash uninvested, hence there's a column "Leftover Cash...".
So cumulatively, one would have invested less than $14,400 over the years into ES3 if dividends were not reinvested.
For ES3 dividends reinvested, because $100 + dividends also cannot be translated 100% into STI ETFs. There will be some cash uninvested, hence there's a column "Leftover Cash...".
But because dividends are reinvested, we also count that as part of the money invested into the ETF.
Hence it has a much higher cumulative sum invested.
Hope that clarifies.
Thanks for the good article.
ReplyDeleteI have two comments.
1. There is such a thing as "compensation" for risk taking. Let me explain. When you keep your money in your CPF accounts, you are more or less guaranteed of the principal as well as the interests, be it 2.5%, 4%, 5% or 6% (if you have a retirement account). On the other hand, putting the money into the STI ETF, you have no guarantee that your full principal will remain intact nor that the dividends will be consistent. In other words, you are taking risk in investing in ETF. To make that investment worth the while, the "compensation" or "returns" from taking that risk should be at least +2% to +3% points higher than what the guaranteed CPF gives you. So as a rule of thumb, you should consider investing money from CPF if:
From OA, the other investment should have potential of returning at least 2.5 + 2 to 3% or 4.5% to 5.5%
From the SA, the other investment should have potential of returning at least 4 + 2 to 3% or 6% to 7%
etc...
If not, its really not worth taking the risk for something not guaranteed versus what is guaranteed.
2. The second point is for those above 55 where they can already withdraw the interest earned from their OA & SA, the liquidity consideration becomes key. Withdrawing the interests from CPF OA & SA nowadays is a matter of a few clicks away and you get the cash in your bank account in less than a minute! So to go and invest the CPF money in ETF for that minute extra gain (some more not guaranteed), is not comprehensible. Imagine if the 55 yo suddenly have an emergency and need the funds, he could easily, with a few clicks of the mouse, make withdrawal from his CPF OA&SA. If he had invested the money in the ETF, he may be forced to sell his ETF holding at the worst possible time like now and suffer a big loss in the process.
If people build up their CPF funds well and consistently over the years, there is less need for them to take the risks in investing in stocks. A couple with say 37 years of continuous employment and contribution to their CPF and with a modest lifestyle should have sufficient CPF savings to sustain their retirement. This will be further boosted by their CPF Life payout when they turn 65.
Investment carries risks with more losing their hard earned money than gaining.
Hi,
DeleteWhat you mentioned is true.
There are risk (risk of lost of capital and volatility risk) associated with stock investment while there is technically no risks associated with CPF.
And investors should get compensated appropriately to the risk they assume.
Everyone's financial situation is different and different assets will suit their risk profile.
But on a comparison basis, ES3 returns are higher than the base CPF returns, although the risk premium might not justify it as a good investment.
In our retirement phase, when we urgently need some money to fund our living or unexpected expenses during market low; this is how we will lose our years of hard earned savings by selling some STI ETF. It is unthinkable; but in real life this can happen to any average retirees in Singapore.
ReplyDeleteHi Createwealth8888
DeleteWhat you said is true.
That's why even retirees need to have some emergency savings set aside.
But then again, assuming between stocks (ETFs) vs CPF. At least when one need cash, selling stocks cheap would at least give them back some cash.
CPF on the other hand, probably a lot tougher to get cash out.