Expected Returns of the Straits Times Index ETF

The SPDR STI ETF is a buyable security that is representative of Singapore’s Straits Times Index.  The ETF has low costs and is priced at about 1/1,000 of the index.

In this article, I’ll attempt to estimate the expected returns of this ETF if held over the long term, assuming that the economics and valuations of the stock market in the future do not differ much compared to today.  The followings are the fundamentals of the ETF as of today:

Distribution Yield 2.74%
Price/Cash Flow 9.50
Price/Earnings 13.27
Number of Holdings 30
Price/Book Ratio 1.28
Weighted Average Market Cap SGD $26,991.30 M

 

At the current P/E ratio of 13.27, the ETF has an average valuation compared to the historical norms.  The estimated net asset value per share is about $3.2 with an expense ratio of 0.3%.

Expected returns (per share) = dividends – expenses + capital appreciation

The dividends per share are 2.74% of $3.2, which is equal $0.088.

The expenses per share are 0.3% of $3.2, which is equal $0.010

Since the price/earnings is 13.27 and price is $3.2, earnings per share equals 3.2/13.27 = $0.241.

After the ETF pays out a dividend of $0.088, it will add to itself a retain-earnings of $0.241-$0.088 = $0.153.  Assuming that the market prices retained-earnings at a ratio of 1.28 (just like today’s P/B ratio), the addition to book value of $0.153 will cause a capital appreciation of $0.153 * 1.28 = $0.196.

As per the equation above, expected returns (per share) = 0.088 – 0.010 + 0.196 = $0.274

Assuming that years down the road, P/E remains at around 13.27 and P/B around 1.28, in percentage terms, the expected annualized return will be 0.274/3.2 = 8.6%!  This is pretty close to the ETF’s performance of 8.39% since its inception in April 2002!

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