Why I'm not into the STI Index Fund

In recent years, index investing have become increasingly popular. Put in simple terms, index investing involves buying into an index fund exchange traded fund (ETF), which would replicate the performances of the specific index, such as Straits Times Index (STI), Standard and Poor 500 (S&P 500), either by actually holding shares of the companies, or through derivatives trading. Such funds are mostly low cost and passively managed, as fund managers only trades in the companies tracked by the index. Proponents of index investing tout its ease of investing, low management cost, and decent long term performance as some of its more outstanding advantages over actively managed funds. One such individual would be Kevin from Turtle Investor in Singapore.

However, to subscribe to this belief, such investors would also have to believe that the market is 100% efficient, and so to beat the market would be an exercise in futility. As value investors, we know that this is not true. We believe that the market is irrational, and opportunities can arise every now and then. 

Also, an advantage that index investors like to tout, which is that investors are able to own a whole basket of companies by just buying into a low cost ETF, is also its greatest weakness, especially in the local context. The S&P 500 consists of the 500 most successful companies listed in the USA, as such, doing research and keeping track on each and everyone of them would be tedious and unlikely to yield any proper results. However, the STI has only 30 companies, a manageable number by any stretch. Also, the STI does not consist of what can be considered 'successful' companies, but rather the 30 largest companies by market capitalisation. What this means is that not every company on the STI is a good company, just that it is a big company, and liable to underperform from time to time. For every DBS or Singtel on the STI, we have a Noble. Thus it would make much better sense to pick and choose the stocks within the STI rather than to buy them all at one go. This is especially after the advent of lot sizes of a 100 shares, as well as the low brokerage fees offered by Standard Chartered. By sifting out the bad companies from the STI, you would by logic have an advantage over index investors in terms of portfolio performance.

Do note that I'm not saying all ETFs are bad, in my opinion bond funds are great for retail investors, giving us access to bonds that would normally require and outlay of at least $250k in capital. ETFs which track a great number of companies, such as the aforementioned S&P 500 are great for the novice investors as well. However, given the relatively small number of companies tracked by the STI, as well as the numerous bad apples we can find within, I would recommend that investors avoid buying into the STI ETFs, and do their due research on what are the companies that deserve their capital outlay.

TLDR: Index investing is a low cost passive way to market performances and has risen in popularity in recent years. However, I would not recommend it in the local context as there are only 30 companies in the index and not all of them are good. Investors are encouraged to do their own due research to sift out the wheat from the chaff to maximise their chances of outperforming the market.