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Lion-OCBC Securities Singapore Low Carbon ETF Review – Is this ETF worth a buy?

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The Lion-OCBC Securities Singapore Low Carbon ETF was launched recently on 28 April 2022.

And the more I look at it, the more it looks like an improved and greener version of the Straits Times Index (STI).

Singapore centric, heavier allocation to technology, and a strong ESG (low carbon) focus.

And very strong historical returns.

So… is this ETF worth a buy?

Note: This post was sponsored by OCBC Securities. All views and opinions expressed in this post are from Financial Horse.

Basics: What is Lion-OCBC Securities Singapore Low Carbon ETF

Very simply – this is an ETF that tracks the top 50 Singapore companies ranked by Free-Float Market Capitalisation (including Real Estate Investment Trusts and Business Trusts), with lower carbon footprint.

Or in other words – it’s Singapore Index 2.0 with an ESG and decarbonisation tilt.

How is the iEdge-OCBC Singapore Low Carbon Select 50 Capped Index created?

The Lion-OCBC Securities Singapore Low Carbon ETF tracks the iEdge-OCBC Singapore Low Carbon Select 50 Capped Index, which is an index created by SGX in collaboration with OCBC Group.

The index is created by a 3 stage process:

  1. Step 1 – Create a reference set of companies that:
    1. Are domiciled or incorporated in Singapore
    2. Meet certain liquidity requirements
    3. Have carbon intensity data
    4. Have no more than 5% involvement in fossil fuels
  2. Step 2 – The companies are then screened based on:
    1. Meeting certain carbon performance criteria
    2. Liquidity and size
  3. Step 3 – The top 50 constituents are then selected to form the index, and weighted based on their score in Step 2
Source: SGX Index Edge as of 31 March 2022

 

The net result – an index that is significantly more ESG / carbon friendly than the STI or the MSCI Singapore.

Source: SGX Index Edge as of 31 March 2022

 

Sector breakdown of the Lion-OCBC Securities Singapore Low Carbon ETF

MSCI Singapore Free Gross Return Index’s weights are proxied through the holdings of iShares MSCI Singapore ETF. All information for the iEdge-OCBC Singapore Low Carbon Select 50 Capped Index prior to its launch date is backtested. Backtested performance of the iEdge-OCBC Singapore Low Carbon Select 50 Capped Index reflects hypothetical historical performance of the Index. Past performance is not necessarily indicative of future performance. The iEdge-OCBC Singapore Low Carbon Select 50 Capped Index was launched on 14 March 2022

Source: SGX Index Edge as of 31 March 2022

One of my main gripes with the STI and MSCI Singapore is that they are too overweight on financials.

Banks make up a whopping 33.74% of the Straits Times Index and 45.95% of the MSCI International Singapore Free Gross Return Index.

You might as well just buy DBS, UOB and OCBC yourself and replicate half the index.

The difference with Lion-OCBC Securities Singapore Low Carbon ETF, is that the allocation to banks drops to a more reasonable 21.48%.

And that excess allocation goes into technology and real estate stocks.

I really like this; it looks like a 21st century take on the STI ETFs.

The top 10 holdings are above, and you can see the usual names like DBS, CICT, SGX, Keppel.

Interestingly, some technology names that the Lion-OCBC Securities Singapore Low Carbon ETF holds include Sea, Flex and iFAST.

All information for the iEdge-OCBC Singapore Low Carbon Select 50 Capped Index prior to its launch date is backtested. Backtested performance of the iEdge-OCBC Singapore Low Carbon Select 50 Capped Index reflects hypothetical historical performance of the Index. Past performance is not necessarily indicative of future performance. The iEdge-OCBC Singapore Low Carbon Select 50 Capped Index was launched on 14 March 2022 Source: SGX Index Edge as of 31 March 2022

Historical Performance of Lion-OCBC Securities Singapore Low Carbon ETF

Because of the additional 14.30% allocation to technology (relative to the Straits Times Index which has zero allocation to technology), historical returns for the Lion-OCBC Securities Singapore Low Carbon ETF are very strong.

You can see the 10-year performance against the STI and MSCI Singapore below.

In this presentation, MSCI Singapore Free Gross Return Index’s weights are proxied through the holdings of iShares MSCI Singapore ETF where returns are based on NAV-NAV basis and assuming all dividends are reinvested net of all charges payable upon reinvestment. All information for the iEdge-OCBC Singapore Low Carbon Select 50 Capped Index prior to its launch date is backtested. Backtested performance of the iEdge-OCBC Singapore Low Carbon Select 50 Capped Index reflects hypothetical historical performance of the Index. Past performance is not necessarily indicative of future performance. The iEdge-OCBC Singapore Low Carbon Select 50 Capped Index was launched on 14 March 2022. Source: SGX Index Edge as of 31 March 2022

Over the past 3, 5 and 10 years, the Lion-OCBC Securities Singapore Low Carbon ETF outperformed both indices by a large margin.

On a shorter, 1 year basis though, MSCI Singapore and STI do outperform the Singapore Low Carbon Select 50 Capped Index (possibly because of the higher allocation to banks).

So there are pros and cons with each allocation.

Dividend 

The Lion-OCBC Securities Singapore Low Carbon ETF may pay an indicative dividend yield of 2.87% per annum (as at 31 March 2022). Distributions are semi-annual, with the ETF’s first distribution expected in December 2022.

Rebalancing

Rebalancing is done semi-annually every March and September.

Note that this is a passive ETF, so the rebalancing is only to track the underlying index.

Expense Ratio

Expense ratio is 0.45% per annum.

This is slightly higher than the STI ETFs, which makes sense because there are US and HK listed counters in here which are not found in STI ETFs.

Can you buy this ETF with CPF-OA and SRS?

As at launch, SRS investing will be available (depending on each broker).

And what I understand is that CPF-OA investing may be available at a later time.

Is the Lion-OCBC Securities Singapore Low Carbon ETF worth a buy?

In my mind, there are 2 big questions I have about the Lion-OCBC Securities Singapore Low Carbon ETF:

  • Does it achieve its goal of decarbonisation?
  • Is this likely to outperform going forward?

ESG & Net Zero is here to stay

What I will say, is that ESG, net zero, decarbonisation, they are here to stay.

The seismic moment for me was when Activist Investor Engine No. 1 won a shareholder battle against Exxon Mobil on decarbonisation.

And successfully installed 3 climate change friendly nominee directors onto Exxon Mobil’s board.

A bit of background – Exxon Mobil is the 600-pound gorilla in the room, with a multi-decade track record of operating in the Oil & Gas sector.

The fact that they themselves proved susceptible to ESG and the net zero push – indicates that nobody is immune.

In the recent meeting between PM Lee and New Zealand PM Jacinda Arden, it was also announced that (1) climate change and the green economy will be a new fifth pillar in the Singapore-New Zealand Enhanced Partnership and (2) the new pillar will include a joint research project on low-carbon technology as well as information exchange on things such as low-emission vehicles and low-carbon initiatives.

Long story short – ESG, net zero, decarbonisation will take on renewed importance as the decade plays out.

As investors, it’s better to get on board with ESG earlier rather than later.

Does it achieve its goal of decarbonisation?

But – does the Lion-OCBC Securities Singapore Low Carbon ETF achieve its goal of decarbonisation?

There has been a lot of criticism of ESG whitewashing recently, namely that it is not easy to measure ESG, and that it is a flawed concept etc.

To give credit where credit is due, among the numerous ESG metrics available, Weighted Average Carbon Intensity (WACI) is an emissions-based carbon exposure metric recommended by the Task Force for Climate-Related Financial Disclosures (TCFD).

My personal view – I don’t think any one method is perfect. Every selection method you use will have its own flaws.

But if you compare the Lion-OCBC Securities Singapore Low Carbon ETF with the MSCI Singapore or the STI ETFs.

Will the Lion-OCBC Securities Singapore Low Carbon ETF be more carbon friendly?

I think the answer will be yes.

Is this ETF likely to outperform going forward?

Whether Lion-OCBC Securities Singapore Low Carbon ETF will outperform going forward is a more tricky question.

It really depends on what you compare it with.

The main difference vs the STI ETFs is the reduced allocation to banks, and increased allocation to technology and real estate.

Banks do well when interest rates go up, while technology doesn’t do as well when interest rates go up.

So from a short term perspective, whether the Lion-OCBC Securities Singapore Low Carbon ETF outperforms the STI will depend on (among others) the interest rate outlook.

Yet the more I think about it, the more I think this may not be the right way to view the Lion-OCBC Securities Singapore Low Carbon ETF.

Who is the target investor for Lion-OCBC Securities Singapore Low Carbon ETF?

I see 2 types of target investors:

  1. Investors who want to invest in Singapore medium to long term
  2. Investors who already have a portfolio, but want to add decarbonisation tilt to it

Investors who want to invest in Singapore long term

If you are serious about investing in Singapore over the middle to long term, your only other options are STI ETFs or MSCI Singapore ETF.

And the problem with both, is that they are very heavy on banks, and have almost zero allocation to technology.

And they do not have an ESG / low carbon focus.

So in some ways, the Lion-OCBC Securities Singapore Low Carbon ETF is a 2022 take of an index to invest in Singapore medium to long term.

If you want to invest in Singapore, with technology allocation, higher real estate allocation and ESG focus, this could be an ETF worth looking at.

Investors who already have a portfolio, but want to add an ESG tilt to it

If you already have a portfolio, and you wanted to add a more ESG / low carbon tilt to it, focusing exclusively on Singapore related stocks, the Lion-OCBC Securities Singapore Low Carbon ETF could be worth checking out too.

My take on the Lion-OCBC Securities Singapore Low Carbon ETF

Personal view – I think this is a very interesting alternative to the more traditional STI ETFs and MSCI Singapore.

It gives you exposure to Singapore’s economy, but with less emphasis on banks and more on technology and real estate. And also a strong tilt towards ESG.

These themes have done very well in the past 5 years.

It’s not easy to call performance over the next 5 – 10 years, but at the very least you will be getting broad exposure to Singapore’s economy with an ETF like this.

The indicative 2.87% dividend yield doesn’t hurt too.

ETF Fees at 0.45% is also acceptable.

Some potential concerns I have – is that this is a relatively new ETF which some investors may find it difficult to understand due to its ESG / low carbon theme.

If it can grow into a few hundred million AUM, this could become a serious competitor to the STI ETFs.

Whatever the case, this is something that should become obvious in time to come.

How to buy / Offering Details – Lion-OCBC Securities Singapore Low Carbon ETF

The Lion-OCBC Securities Singapore Low Carbon ETF is listed on 28 April 2022.

For more information, visit www.iocbc.com/sglowcarbon.

So if you are keen, you just have to go onto the open market and buy it! It will also be available on OCBC Blue Chip Investment plan by late May.

Note: This post was sponsored by OCBC Securities. All views and opinions expressed in this post are from Financial Horse.

 

Disclaimers

Trading in capital market products, and borrowing to finance the trading transactions (including but not limited to leveraged trading or gearing) can be very risky, and you may lose all or more than the amount invested or deposited. Where necessary, please seek advice from an independent financial adviser regarding the suitability of any trade or investment product taking into account your investment objectives, financial situation or particular needs before making a commitment to trade or purchase the investment product. You should consider carefully and exercise caution in making any trading decision whether or not you have received advice from any financial adviser. If you choose not to seek independent financial advice, please consider whether the trade or product in question is suitable for you. You should also read the relevant prospectus and/or profile statement (a copy of which may be obtained from the relevant fund manager or any of its approved distributors), prior to any trading or investment decision. In relation to collective investment schemes, the value of the units and the income accruing therefrom, if any, may rise or fall. For funds that are listed on an approved exchange, investors are not allowed to redeem their units in those funds with the manager, save except under certain specified conditions. The listing of the units of those funds on any approved exchange does not guarantee a liquid market for the units.

This ETF is subjected to the following principal risks including but not limited to market and credit risk, foreign exchange risk, liquidity risks and product specific risks relating to the ETF. Some or all of the risks may adversely affect the Fund’s Net Asset Value, yield, total return and/or its ability to achieve its investment objective. You should note the risk factors associated with investing in the ETF. The statements in the prospectus are intended to be summaries of some of these risks. They are by no means exhaustive and they do not offer advice on the suitability of investing in the ETF. You should read the prospectus and carefully consider the risk factors described together with all of the other information included in the prospectus before deciding whether to invest in the ETF.

All views expressed here belong to and are independent opinions of the writer and are for information purposes only. They do not take into account the specific objectives, financial situation or particular needs of any particular person. You should not make any decisions without independently verifying or assessing the contents. OCBC Securities Private Limited (“OCBC Securities”) does not endorse and makes no representation or warranty whatsoever in respect of any view expressed here and shall not be responsible for any loss or damage whatsoever arising, directly or indirectly, howsoever as a result of any person acting on any view expressed here.

This advertisement has not been reviewed by the Monetary Authority of Singapore.

 

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