Saturday, September 17, 2011

Update on Historical Volatility of SPH and STI ETF

With regards to my earlier post on volatility, yes the calculation was a bit off but it has no material impact on my comparision. But anyhow, for folks interested in the volatility of SPH and STI, I have taken monthly returns from 2008 Jan to 2011 Sept. Calculation was based on excel. The results are quite similar, SPH and STI has a correlation of 86.5%; Annualized volatility of SPH was 22.28%, STI (ETF) was 25.15%.



Unfortunately, volatility does not tell you whether it is upside volatility or downside volatility. It also assumes the same weightage of volatility throughout every month, which is not accurate. It also does not factor in dividends that affects price movement much more on certain days.




Compared to Schroders Singapore Trust, the average 3 year volatility was 23.7%, which is higher than benchmark. As for the returns, it returned 18% over 3 years.


Assuming one bought SPH at 2008 1st Sept at price of $3.98, dividend yield for 3 years would have been 19.85%.


Assuming one bought STI ETF at 2008 1st Sept at price of $2.45, dividend yield for 3 years would have been 5.78%.



At 1st Sept 2011 SPH price of $3.73, total return for the same investor would be 13.57%.


At 1st Sept 2011 STI ETF price of $2.92, total return for the same investor would be capital gain of 19.2% + dividend of 5.78% = 25%


It is likely that actively managed funds under performed ETFs due to higher management and brokerage costs.


This post will convince most people to diversify into ETFs and stop holding large single stock holdings, which includes me!!!!

5 comments:

Musicwhiz said...

Just one simple comment from me to sum up my thoughts on this post - Volatility is NOT equal to risk.

Regards,
Musicwhiz

Temperament said...

Sorry,
i think one "evidence" does not make a summer. Though some index equities are safer than individual stocks in general due to you are buying a bundle of grapes rather than a single grape.
But don't buy just any index funds. Some are many times riskier than individual stocks. You don't really know what's in the bundled index fund. Especially many ETFs now are quite dangerous.
Ya? No?
Some index funds never recover for donkey years.

Sgbluechip said...

Hi MW, agree. Volatility is a poor measure of risk, as explained by Peter Carr, "it is only a good measure of risk if you feel that being rich then being poor is the same as being poor then rich".

CreateWealth8888 said...

We all can build our own mini or micro "ETF".

PanzerGrenadier said...

Hi SG Bluechips

The total returns in ETF only beats SPH for the same period if one sells the investment, i.e. withdraw your capital from equities.

Investors like myself do hold onto SPH for a few years and even with an intention to hold long term (> 10 years) Thus, on the assumption that we want to buy and hold and go for yield, SPH would be a better asset as its' dividends are higher on a yield basis.

Also ETFs do impose a cost and do not track the index 100% as their disclaimers state due to admin costs, etc.

Be well and prosper.