How to get 5% p.a.^ dividend income as a passive investor (for the first 2 years based on the ETF’s Issue Price during its initial offer period) (Lion-OCBC Securities APAC Financials Dividend Plus ETF review)

Singapore investors love dividends.

Whether you are a young investor growing your wealth, or a retiree looking for retirement income, it’s never too late to start investing for dividend yield.

How to diversify your dividend income sources as a passive investor?

Let’s say you’re a Singapore investor – looking to invest for dividend yield today. 

What are the options available?

A common approach would be to select a couple of Singapore blue-chip dividend stocks / REITs. For instance, DBS, OCBC, CapitaLand Ascendas REIT, CICT.²

The problem with this Singapore centric approach:

1. Single stock risk – Eg. If CICT has an earnings miss
2. Singapore exposure risk – if Singapore doesn’t do well in certain economic cycles, this portfolio will have problems

An alternative is to become an active investor.

This requires time and expertise to analyze the stocks you buy, as well as when to sell and rebalance your portfolio.

For investors who don’t have the time or inclination to actively monitor your own portfolio, a good option to consider is investing in ETFs. 

What about the world’s first APAC Financials ETF?

I was excited to learn that Lion Global Investors and OCBC Securities would be collaborating to launch the world’s first ETF focused on financials sector across Asia Pacific – that pays a minimum dividend yield of 5% p.a.¹ of the ETF’s Issue Price for the first 2 years.

Disclosure: This post is sponsored by Lion Global Investors and OCBC Securities. All views and opinions expressed in this post are from Financial Horse.

Lion-OCBC Securities APAC Financials Dividend Plus ETF – minimum 5% p.a.¹ dividend yield for first 2 years (of the ETF’s issue price)

The full description of Lion-OCBC Securities APAC Financials Dividend Plus ETF is below.

But to sum up, this ETF:

1. Provides access to 30 of the largest and most tradable financial institutions³ in Asia Pacific (including Singapore)
2. Pays a minimum dividend of 5% p.a.¹ for the first 2 years (of the ETF’s issue price)

“The Lion-OCBC Securities APAC Financials Dividend Plus ETF is the world’s first APAC Financials ETF, riding on APAC’s financial strengths while providing investors with stable dividends.¹

The investment objective of the Fund is to replicate as closely as possible, before expenses, the performance of the iEdge APAC Financials Dividend Plus Index using a direct investment policy of investing in all, or substantially all, of the underlying Index Securities.

The Index is compiled and calculated by Singapore Exchange Limited.

The Index aims to track the 30 largest and most tradable companies listed in Asia Pacific and is designed to provide access to stable dividend payout attributes and growth in the financials sector.”

Asset Allocation for iEdge APAC Financials Dividend Plus Index

I’ve extracted their asset allocation below (as of 31 March 2024).

The top 5 countries are:

1. Japan (20.6%)
2. Singapore (20.4%)
3. Australia (19.8%)
4. Hong Kong (19.1%)
5. South Korea (16.3%)

Collectively, these countries make up almost 96% of the Index.

You can see the top 5 holdings² as well (as of 31 March 2024):

1. DBS Bank (7%)
2. OCBC Bank (7%)
3. UOB Bank (6%)
4. KB Financial Group – South Korean Bank (6%)
5. Sumitomo Mitsui Financial Group – Japanese Bank (6%)

The Index gives you exposure to the familiar DBS, OCBC and UOB bank for the dividend yield, but also includes the Japan, Australia, Korea, Hong Kong, Malaysia, Indonesia and Thailand financials sector to diversify the Singapore exposure.

Returns for iEdge APAC Index

The Lion-OCBC Securities APAC Financials Dividend Plus ETF tracks the iEdge APAC Financials Dividend Plus Index.

Between 2 February 2024 (index launch date) and 31 March 2024, we have seen the Index return 8.0%⁷, outperforming Straits Times Index’s 1.9% and iEdge S-REIT Leaders Index’s -3.3%.

This handily outperforms both the STI Index and the REIT index (although to be fair the REITs have been punished because of higher interest rates, while banks have been doing well for that exact reason).

Do note that this is a very small window of just 2 months (given the index was only launched on 2 Feb), so I do caution against extrapolating that 8% return into the future.

What I like about the Lion-OCBC Securities APAC Financials Dividend Plus ETF

Simple fuss free exposure to Asia Pacific’s largest and most tradable financial institutions³

I like that this ETF gives you a simple solution – you can access a basket of the largest and most tradable financial institutions³ across Asia Pacific.

As a retail investor, if I were to buy the banks today, I would probably go for a couple of the local banks, DBS Bank and OCBC Bank², and maybe a couple of China banks listed in Hong Kong.

The chance of me going out of my way to buy an Australian, Korean or Japanese bank, is frankly quite low.

And this ETF solves that.

If you are bullish on financial institutions, and you want to invest in them but not be overexposed to Singapore.

I think this is a great option – and it’s the world’s first ETF focused on Asia Pacific Financial Institutions³.

The ETF focuses on quality financial institutions³, so you get potentially more stable dividend income¹. Not only do you get the biggest financial institutions³ in Singapore, you also get access to top financial institutions³ and banks in Australia, Malaysia, South Korea, Japan, Hong Kong, Indonesia and Thailand .

For instance, National Australia Bank² is Australia’s top business lender with 21.7% market share in FY 2023⁷. (Source: National Australia Bank Full Year Results 2023)

Minimum dividend yield of 5% p.a.¹ (of the ETF’s issue price, for the first 2 years)

The index itself has a net dividend yield of 5.91% p.a.⁷ as of 31 March 2024 (Source: Bloomberg).

This will of course, fluctuate over time if the financial institutions³ themselves raise or cut dividend yields.

However, the ETF has committed to a minimum dividend yield of 5.0% p.a.¹ (of the ETF’s issue price) for the first 2 years.

How sustainable is the intended 5% dividend yield? (after the first 2 years)

I guess the question is how sustainable the intended 5% dividend yield is, after the initial 2 years. 

As of 31 March 2024, the current net dividend yield for the underlying index is 5.91%⁷.

But what if we get interest rate cuts, or an economic slowdown, such that the banks themselves cut dividends?

Well I suppose if you just bought DBS / UOB / OCBC bank² directly you would have the same problem.

The benefit with buying via the ETF is that there is geographical diversification.

So for example, in the event the Singapore banks cut dividends, the Hong Kong listed and Japan banks may be able to maintain / increase their dividends (because they are at a different point in their interest rate cycle), allowing you to maintain the 5% dividend yield¹.

Financial Services is among the world’s most profitable sectors

The ETF also gives you exposure to the financial sector generally, which not only includes banks, but also investment management, insurance and brokerages & exchanges.

Insurance companies in particular are an increasingly high-growth industry, and there are powerful diversification benefits (vs just buying DBS/ OCBC / UOB bank)².

Potential Risks of Lion-OCBC Securities APAC Financials Dividend Plus ETF

Exposure to interest rate risk?

The biggest risk that jumps out at me with buying an ETF primarily focused on the financial sector would probably be interest rate risk.

Yes, banks have done well the past few years because of higher interest rates.

But if we see US interest rate cuts going forward – will this lead to underperformance for the banks?

The saving grace is that because the ETF invests in the across the Asia Pacific region, it gives you a lot of diversification from an interest rate cycle perspective.

For example, the Japanese central bank is projected to raise interest rates going forward, instead of cutting.

Whereas for China (which the Hong Kong listed Financial Institutions may have exposure to), the central bank has already been cutting interest rates since 2021.

So this ETF allows you to diversify, instead of just investing in Singapore where we are very tied to the US interest rate cycle.

Geographical exposure

The other risk is exposure to Hong Kong listed banks – such as China Construction Bank and ICBC.

China banks listed in Hong Kong such as ICBC offer very attractive 8% dividend yields today⁷ (Source: Morningstar as at 22 April 2024), which helps bring the dividend yield of the ETF up.

At the same time, not every investor is comfortable with exposure given the subdued economic growth and weak property sector, so it depends on your personal risk appetite (Source: SGX Index Edge as of 31 March 2024). 

Fees and Dividend policy of Lion-OCBC Securities APAC Financials Dividend Plus ETF

The management fees are at 0.50% per annum, which is generally in line with Singapore ETFs.

Dividends are quarterly, paid in March, June, September, and December.

As shared above, the fund intends to have 5% p.a.¹ dividend yield of the ETF’s Issue Price for the first 2 years. 

From year 3 onwards, the ETF intends to declare quarterly distributions of around 5% p.a.* (of the ETF’s issue price).

*Distributions are not guaranteed and are subject at all times to the fund manager’s discretion

Can you invest in this ETF using CPFIS or SRS funds?

CPFIS is not available for Lion-OCBC Securities APAC Financials Dividend Plus ETF as this is a new ETF.

You can use SRS funds to purchase the ETF though, once it has been listed on the SGX (target listing is 13 May 2024).

Will I buy Lion-OCBC Securities APAC Financials Dividend Plus ETF?

The way I see it, it’s very hard to replicate an asset allocation like this on your own – with exposure to financial sectors in Singapore, Malaysia, Japan, Australia, Korea, Hong Kong, Thailand and Indonesia.

Realistically, most of us would just buy DBS Bank / OCBC Bank or maybe UOB Bank and call it a day.

That’s a lot of concentration risk in Singapore.

Sure Singapore banks are doing well today, but will that change in the next 24 months?

Who knows.

So I like that this ETF gives you a simple and fuss free way to get exposure to the largest and most tradable financial institutions³ across Asia Pacific.

For instance, Japan is on a different interest rate cycle compared to Singapore, which provides powerful diversification benefits.

For passive dividend investors who don’t want to bother with stock picking, and want diversification, this new ETF is a very interesting option.

How to buy Lion-OCBC Securities APAC Financials Dividend Plus ETF?

The initial offer period is from 11 April to 3 May 2024.

During this time, you can subscribe for the Lion-OCBC Securities APAC Financials Dividend Plus ETF via OCBC ATM, Mobile and Online Banking, or any of the brokers below.

Promotions for Lion-OCBC Securities APAC Financials Dividend Plus ETF

For OCBC customers:

• Application fee of S$2 is waived if you subscribe via OCBC ATM, online banking or mobile banking before 2 May, 12pm. The minimum subscription quantity set and required to qualify for this promotion is 2,000 units.
• Get S$20 cash for every 10,000 units subscribed via OCBC ATM, online banking or mobile banking before 2 May, 12pm. Limited to S$1,000 cash per customer.

For OCBC Securities customers:

• Earn 12,500 VOYAGE Miles for every S$150,000 subscribed via OCBC Securities before 30 Apr, 12pm. There is a cap of 50,000 VOYAGE Miles per Eligible Customer.
• Get S$100 cash rebate for every 50,000 units subscribed via OCBC Securities before 30 Apr, 12pm. Limited to S$1,000 cash rebate per customer.

For POEMS customers:

• Get S$20 cash credits for every 10,000 units subscribed before 2 May, 5pm. Limited to S$500 cash credits per customer. For the first 88 customers.

Terms and conditions apply.

Alternatively, once the ETF is listed (target date is 13 May), you can buy it on the open market on SGX.

Click here to find out more.

 

 

^{1, ^} As set out in the prospectus, distribution payments shall, at the sole discretion of the Manager, be made out of either (a) distributable income; or (b) capital gains; or (c) capital of the Deposited Property or a combination of (a) and/or (b) and/or (c). Distributions are not guaranteed and may fluctuate. Past performance, yields, and payments are not necessarily indicative of future or likely performance, yields, and payments. Distribution payouts and its frequency might be changed at the Manager’s discretion and can be made out of distributable income, capital or both. Any payment of distributions by the fund may result in an immediate reduction of the net asset value per share/unit. The Fund seeks to invest all or substantially all of the Fund’s assets in Index Securities in substantially the same weightings as reflected in the Index. Please refer to the fund prospectus for more information on the ETF’s distribution policy. Please refer to lionglobalinvestors.com for more information on the income disclosures.

²  Securities referenced are not intended as recommendations to buy or sell

³ The company’s business sector must be classified as “Banking, Insurance, Investment Services, or Specialty Finance & Services”, as defined by FactSet’s Revere Business Industry Classification System (RBICS). ​

⁷ Past performance, yields and payments are not necessarily indicative of future or likely performance, yields and payments

⁸ References to specific corporations/companies and their trademarks are not intended as recommendations to purchase or sell investments in such corporations/companies nor do they directly or indirectly express or imply any sponsorship, affiliation, certification, association, approval, connection or endorsement between any of these corporations/companies, OCBC Securities Private Limited and Lion Global Investors Limited or the products and services of OCBC Securities Private Limited and Lion Global Investors Limited.

⁹ Refers to OCBC Securities Private Limited.

 

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You should read the prospectus and Product Highlights Sheet of the Lion-OCBC Securities APAC Financials Dividend Plus ETF (“ETF”), which is available and may be obtained from Lion Global Investors Limited (LGI) or any of the its distributors and appointed Participating Dealers (“PDs”), for further details including the risk factors and consider if the ETF is suitable for you and seek such advice from a financial adviser if necessary, before deciding whether to purchase units in the ETF. ​Investments in the ETF are not obligations of, deposits in, guaranteed or insured by LGI or any of its affiliates and are subject to investment risks including the possible loss of the principal amount invested. The performance of the ETF is not guaranteed and, the value of its units and the income accruing to the units, if any, may rise or fall. Past performance, payout yields and payments, as well as, any prediction, projection, or forecast are not necessarily indicative of the future or likely performance, payout yields and payments of the ETF. Any extraordinary performance may be due to exceptional circumstances which may not be sustainable. Dividend distributions, which may be either out of income and/or capital, are not guaranteed and subject to LGI’s discretion. Any such dividend distributions will reduce the available capital for reinvestment and may result in an immediate decrease in the net asset value of the ETF. Any references to specific securities are for illustration purposes and are not to be considered as recommendations to buy or sell the securities. It should not be assumed that investment in such specific securities will be profitable. There can be no assurance that any of the allocations or holdings presented will remain in the ETF at the time this information is presented. Any information (which includes opinions, estimates, graphs, charts, formulae or devices) is subject to change or correction at any time without notice and is not to be relied on as advice. You are advised to conduct your own independent assessment and investigation of the relevance, accuracy, adequacy and reliability of any information or contained herein and seek professional advice on them. No warranty is given and no liability is accepted for any loss arising directly or indirectly as a result of you acting on such information. The ETF may, where permitted by the prospectus, invest in financial derivative instruments for hedging purposes or for efficient portfolio management. The ETF’s net asset value may have higher volatility as a result of its narrower investment focus on a limited geographical market, when compared to funds investing in global markets. LGI, its related companies, their directors and/or employees may hold units of the ETF and be engaged in purchasing or selling units of the ETF for themselves or their clients.​

The units of the ETF are listed and traded on the Singapore Exchange Securities Trading Limited (“SGX-ST”), and may be traded at prices different from its net asset value, suspended from trading, or delisted. Such listing does not guarantee a liquid market for the units. You cannot purchase or redeem units in the ETF directly with the manager of the ETF, but you may, subject to specific conditions, do so on the SGX-ST or through the PDs. ​

© Lion Global Investors Limited (UEN/ Registration No. 198601745D). All rights reserved. LGI is a Singapore incorporated company and is not related to any corporation or trading entity that is domiciled in Europe or the United States (other than entities owned by its holding companies).​

 

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Disclaimer – Singapore Exchange Limited​

The units of the Lion-OCBC Securities APAC Financials Dividend Plus ETF are not in any way sponsored, endorsed, sold or promoted by the Singapore Exchange Limited (“SGX”) and/or its affiliates and SGX and/or its affiliates make no warranty or representation whatsoever, expressly or impliedly, either as to the results to be obtained from the use of the iEdge APAC Financials Dividend Plus Index and/or the figure at which the iEdge APAC Financials Dividend Plus Index stands at any particular time on any particular day or otherwise. The iEdge APAC Financials Dividend Plus Index is administrated, calculated and published by SGX. SGX shall not be liable (whether in negligence or otherwise) to any person for any error in the Lion-OCBC Securities APAC Financials Dividend Plus ETF and the iEdge APAC Financials Dividend Plus Index and shall not be under any obligation to advise any person of any error therein.​

Intellectual property rights in the iEdge APAC Financials Dividend Plus Index vest in SGX. The iEdge APAC Financials Dividend Plus Index is used by Lion Global Investors Limited under licence. ​