Singapore ETF: Investing In The Lion City

by on December 16, 2009 | ETFs Mentioned:

Since its early days as a British trading hub, Singapore has grown quickly from a small town to a bustling port, a major financial center, and the jewel of Southeast Asia. At its birth as an independent country in the mid 1960′s, Singapore’s future prospects looked bleak; no natural resources, a small market, and less-than-friendly neighbors created a difficult economic environment. But Singapore has beaten the odds, transforming itself into an economic powerhouse with a per capita GDP higher than the United States. With a population approaching 5 million, Singapore is one of the most densely populated places on Earth and growth opportunities are limited. But as one of the most capitalist countries in the world, this member of the ‘Four Asian Tigers’ represents an intriguing investment opportunity.

A Lesson In Management

Singapore ETFs Have Delivered Big Gains In 2009Having lived in the country for several months, I can attest that Singapore is one of most well run and efficient countries in the world. Tropical weather, clean streets, and virtually non-existent crime levels are just a few of the attractions. Singapore has a robust public transportation network, a quality health system, and a good selection of schools. The government provides all of these services despite charging a tax rate of just 17% on corporations and a marginal rate of 20% on incomes over $300,000 (Singaporean dollars).

Singaporeans are able to get such a high bang for their buck on their tax dollars because they are ranked in the top 5 for least corrupt countries and quality of strong investor protections. Both of these have continued to bring foreign investment dollars into the country, which has kept Singapore rich and its people fully employed. The surge in unemployment to 3.4% that the country has seen recently is astounding – figures that would thrill most Western economists even in boom times.

Competitive Advantages

Singapore is the hub of business activity in Southeast Asia and for good reason; the GDP per capita of Singapore is $51,600, putting it in the top ten worldwide. In addition to its low tax rates (which encourage international investment), Singapore City was rated as having the best total  infrastructure out of any major city. So it is no surprise then that the country is also a shipping leader: as of 2007, it had the busiest port in the world. Singapore has used its advantageous and strategic location to become the focal point of all of Southeast Asia.

Lacking significant natural resources and offering a relatively small market, Singapore was forced to attract foreign investment in other ways – low taxes, impressive infrastructure, and investor-friendly laws. In fact, Singapore was ranked third in a recent global competitiveness report behind only the United States and Switzerland. It is remarkable that Singapore has been able to outpace its much poorer and larger neighbors, especially Indonesia, in such a short period of time. Singapore has proven that pro-business policies when combined with quality infrastructure and a stable government, can turn even the most unlikely places into investment hot spots.

Not a Self-Sustaining Economy

Despite Singapore’s many strengths, the country is very dependent on foreigners to sustain its economy. The small island imports nearly all of its food and fresh water from neighboring Malaysia and relies on foreign demand to maintain its export-driven economy. In addition, Singapore has historically had tense relationships with its much larger neighbors Malaysia and Indonesia, although relations have improved greatly as of late. If instability arises in Malaysia it could have a drastic impact on Singaporean consumer staples and leave the people of the island country in a very desperate situation.

Should the world economy not steadily improve, Singapore’s economy could pay the price. In addition to exporting high tech goods, Singapore is a regional finance center that could be hurt by a continued downturn. Lastly, China has been in talks with Thailand as of late to build a “Thai Canal” at the cost of over $20 billion. This canal, if ever completed, would be a huge blow to Singapore as it would cut of a sizable amount of shipping traffic that presently stops in Singapore. However, the prospects for this in the near term are rather uncertain.

Singapore ETFs

Currently there is only one ETF that focuses on the Singapore market: the iShares MSCI Singapore Index Fund (EWS). The fund has a modest expense ratio of 0.52% and it is up more than 60% in 2009. The fund also has good levels of liquidity; it has average volume of over 3.2 million shares on its $1.49 billion in assets under management.

EWS is heavily weighted towards financial firms with close to half of the assets in the banking sector. However, industrials which make up 21.5%, and telecommunication firms (13.2%) also make up sizable portions of the fund. There are only 28 stocks in this ETF so many of the individual holdings have very high weightings; in fact the top four holdings make up over 45% of the fund.


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Disclosure: No positions at time of writing.