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How this ETF can help you adapt to economic shifts by tapping US leading companies
Rapid changes in market conditions show the importance of diversification, which the SPDR® S&P 500® ETF Trust provides through its exposure to many of the world’s biggest firms
ETFs can help investors navigate volatile economic conditions by diversifying their portfolios. PHOTO: GETTY IMAGES
The global economy looked very different a year ago.
Back then, there were widespread concerns the US would fall into a recession as the Federal Reserve hiked interest rates aggressively in response to inflation that hit a 40-year high in June. The picture in China, in contrast, appeared relatively benign, with many economists expecting its reopening to give a much-needed lift to the rest of the world.
China has since eased border and trade restrictions, but the recovery has been weaker than expected. Problems in its property sector are threatening to spill over into other sectors of the world’s second largest economy.
In September, the OECD said a sharper-than-expected slowdown in China has become a key risk as it cut its growth forecasts for the global economy1.
Economic conditions in the US are now looking a lot more robust. The contrast in fortunes is reflected in the stock market, with the S&P 500 index gaining 14.3 per cent since the start of 20232 and the Hang Seng Index falling around 7.4 per cent in USD terms over the same period. The Hang Seng, Hong Kong’s main stock barometer, includes the largest and most liquid companies listed on the main board of the Stock Exchange of Hong Kong such as Alibaba, Tencent, HSBC, AIA and Meituan.
The Straits Times Index has also fallen since the start of the year but the Singapore dollar strengthened against the US dollar, appreciating 1.96 per cent year-to-date.
Diversification during volatile times
“In uncertain times like these, when economic conditions can shift rapidly, it is important to have a diversified portfolio. The SPDR® S&P 500® ETF Trust, which tracks the S&P 500 index, provides investors with exposure to the world’s largest economy and many of the world’s biggest companies,” says Jermyn Wong, Head of SPDR ETF Singapore at State Street Global Advisors.
According to the OECD3, the US economy has proved unexpectedly resilient to the steep rise in interest rates as household spending is being supported by a rundown of excess savings accumulated during the pandemic.
The US has also benefitted from more than US$100 billion4 (S$137 billion) in new clean energy investment commitments, thanks to incentives provided under the Inflation Reduction Act that took effect in August last year.
But while employment and consumer spending in the US have held up, analysts warn that political divisions could derail the economy during the fourth quarter5.
Why invest in the S&P 500 index
An indicator that can help investors gauge how well US companies are doing in the stock market is the S&P 500 index. The index’s performance often reflects broader economic and market trends, given that it tracks the top 500 listed companies in the US, many of which are global titans whose operations span the globe.
The companies that make up the index include Microsoft and Google’s parent Alphabet, which are major players in the emerging field of generative AI; electric car maker Tesla, which is also a developer of driverless car technologies; and Warren Buffett’s Berkshire Hathaway.
The S&P 500 index is reviewed periodically and updated as needed to reflect current market conditions.
Over the past 10 years, the S&P 500 index has gained an average of just over 12 per cent per annum in US dollar terms6.
Investing via ETFs
As it is not possible to invest directly in the S&P 500 index, investors gain exposure through ETFs such as State Street Global Advisors’ SPDR® S&P 500® ETF Trust, which is designed to match the performance of the S&P 500 index before expenses. For the SPDR® S&P 500® ETF Trust, the fees work out to less than 0.1 per cent per annum.
The SPDR® S&P 500® ETF Trust is listed on the Singapore Exchange (SGX), which means investors can buy and sell the ETF during trading hours at prices that are updated immediately. ETFs purchased via the SGX are deposited into CDP accounts, providing another level of convenience to investors who do not need to open a separate custodian account.
In addition, investors can use their Supplementary Retirement Scheme (SRS) savings to buy the SPDR® S&P 500® ETF Trust.
“Investing in ETFs offer investors diversification benefits which cannot otherwise be achieved by investing in single stocks. In the case of SPDR® S&P 500® ETF Trust, investors gain exposure to 500 companies with one single trade,” Mr Wong says
An investor who purchased the SPDR® S&P 500® ETF Trust when it was listed in Singapore in May 2001 would have earned an annualised 7.9 per cent in US dollar terms. Had the investor bought the trust five years ago, the returns would have been a higher 10.98 per cent per annum7 (see table below).
In both cases, the returns are just a whisker below the rise in the S&P 500 index due to the low management fees.
While stocks may be volatile in the short term, they tend to rise over time and offer higher returns than bonds or fixed deposits.
State Street Global Advisors’ Mr Wong says the global economic outlook remains uncertain and is further complicated by many geo-political and climate issues that may affect growth and investor confidence.
“We need to expect the unexpected, which is why diversification is so important in every investment portfolio. The SPDR® S&P 500® ETF Trust provides part of this diversification through its exposure to the US and many of the world’s leading companies.”
The ETF that changed the world
ETFs are ubiquitous in the world of investing, used by many from mom-and-pop investors to pension funds with hundreds of billions of dollars in assets.
But this wasn’t the case 30 years ago, when State Street Global Advisors launched the first exchange-traded fund (ETF) in the US in January 1993. At that time, Wall Street was looking for a single security to represent the broad market and address weaknesses discovered in the aftermath of the 1987 global stock market crash known as “Black Monday”.
The SPDR® S&P 500® ETF Trust was the culmination of several years of work to meet this demand.
Executives who led the ETF’s development recalled countless late-night tests to mimic moving 500 different securities from a broker-dealer to State Street Global Advisors and back. It had never been done before – and no one was 100 per cent sure the ETF could work.
The SPDR® S&P 500® ETF Trust proved its worth after the Sept 11 terror attacks in 2001 by providing liquidity and an implied valuation for stocks after US stock exchanges were shut down for six days.
From a hedging tool used by fund managers, ETFs have evolved to become a multi-trillion-dollar industry. Many small investors use ETFs to invest in shares as an alternative to mutual funds or direct investments.
“The SPDR® S&P 500® ETF Trust democratised investing – opening the door to markets that were inaccessible to the majority of investors prior to 1993,” says State Street Global Advisors’ Head of SPDR ETF Singapore, Jermyn Wong.
2 As at the close of trading on Sept 25, 2023
5 https://www.cnbc.com/2023/09/21/house-speaker-mccarthy-squeezed-in-shutdown-fight-markets-worry.html
6 Source: Factset, from Aug 31, 2013 to Aug 31, 2023
7 As of Aug 31, 2023
Terms and conditions
State Street Global Advisors Singapore Limited (“SSGA”), 168, Robinson Road, #33-01 Capital Tower, Singapore 068912 (Company Reg. No: 200002719D, regulated by the Monetary Authority of Singapore). T: +65 6826-7555. F: +65 6826-7501.
All forms of investments carry risks, including the risk of losing all of the invested amount. Such activities may not be suitable for everyone.
The prospectus in respect of the offer of the units (the "Units") in the SPDR® S&P 500® ETF Trust (the "Fund") is available and may be obtained upon request. Investors should read the prospectus before deciding whether to acquire Units in the Fund. The value of Units and the income accruing to such Units may fall or rise. Brokerage commissions and ETF expenses will reduce returns. Units in the Fund are not obligations of, deposits in, or guaranteed by, SSGA or any of its affiliates. An investment in Units is subject to investment risks, including the possible loss of the principal amount invested. Such activities may not be suitable for everyone. Past performance figures are not necessarily indicative of future performance of the Fund. Investors have no right to request SSGA to redeem their Units while the Units are listed. It is intended that holders of Units may only deal in their Units through trading on the Singapore Exchange Securities Trading Limited ("SGX-ST") or NYSE Arca Inc. (“NYSE Arca”). Listing of the Units on the SGX-ST or the NYSE Arca does not guarantee a liquid market for the Units. This advertisement or publication has not been reviewed by the Monetary Authority of Singapore.
The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor.
References to specific company stocks should not be construed as recommendations or investment advice. The statements and opinions are subject to change at any time, based on market and other conditions.
The SPDR® S&P 500® ETF (SPY) is a US domiciled ETF. The Singapore domiciled SPDR® S&P 500® ETF Trust (S27) was first listed on the SGX on May 4, 2001.
For more risk information, please visit www.ssga.com/sg
