$$$ KPO and CZM $$$: How ETFs Work - Using Lion-Phillip S-REIT ETF as an Example

Monday, October 9, 2017

How ETFs Work - Using Lion-Phillip S-REIT ETF as an Example

I have written an article on SGX 3rd REIT ETF - Lion-Phillip S-REIT ETF last week. CZM and I were initially quite interested until some of the readers mentioned that there will be a 17% corporate tax which will reduce the dividends significantly! Do check it out if you have yet to read it :)

We all know that Exchange Traded Funds (ETFs) are low cost passive funds but have you ever wonder/know how ETF works? Vanguard has an article explaining this - How ETFs work.

Using Lion-Phillip S-REIT ETF as an example, the ETF sponsor is Lion Global Investors Limited and Phillip Capital Management (S) Ltd. The participating dealers would be the banks and brokerage firms (Phillip Securities Pte Ltd, DBS Vickers Securities (Singapore) Pte Ltd, Commerzbank AG and UOB Kay Hian Pte Ltd).

The Creation Process (Happening Now!)
The participating dealers applies for a creation unit (at least 50,000 units or more) from the ETF sponsor by either giving basket of securities, cash that equals the value of the creation unit or a combination of the two. In this case, I believe the payment is in cash and each unit is valued at a NAV of $1 per unit. The participating dealers can then "sell" them to retail investors or trade them in the exchange/secondary market.

The Redemption Process
The participating dealers can redeem creation units (similarly at least 50,000 units or more) from the ETF sponsor and receives a basket of securities, cash equivalent or a combination of the two. This will probably takes place only after the ETF is listed on the exchange.

Why is there a need to have these 2 processes? The reason is ETF arbitrage can take place where the participating dealers can make more money. This is slightly more complicated and you can research more on it yourself. In short, it provides liquidity to the ETF and it ensures that the market price of the ETF is close to its NAV.

With this new knowledge, let's take a look at the 2 REIT ETFs in the market now and their respective AUM (Asset Under Management):
1. NikkoAM-StraitsTrading Asia ex Japan REIT ETF - S$79.82 million
2. Phillip SGX APAC Dividend Leaders REIT ETF - S$24.23 million

Since Lion-Phillip S-REIT ETF consists of only REITs from SGX, it might not attract investors from the region. Hence, assuming each of the participating dealers were to create S$3 million of ETF shares each, Lion-Phillip S-REIT ETF would have an AUM of S$12 million.

Based on the above weightings, I created a spreadsheet to estimate the number of underlying shares required for each creation (50,000 of ETF units).

If we were to look at the top 3 stocks, each creation would require 26,634 units of Capitaland Mall Trust, 31,250 units of Capitaland Commercial Trust and 26,233 units of Suntec REIT. An AUM of 12 million would require 639,208 units of Capitaland Mall Trust, 750,000 units of Capitaland Commercial Trust and 629,602 units of Suntec REIT.

Would that actually drive the underlying REITs price up? I have no idea. lol. However, putting things into context, the percentage of underlying shares required from the outstanding shares is only around 0.02%. On the other hand, it was stated in CMT 2016 Annual Report that 59.38% of the shares are held with the public. This would mean about 3% of the public float would be purchased/held by the ETF sponsor for a S$12 million AUM portfolio. So what do you think?

You can find the spreadsheet here - LION-PHILLIP S-REIT ETF Creation - Underlying Stocks Required. Feel free to play with it :)

Health - KPO Needs to Lose Weight
Date: 2017-10-09
Weight: 78.5 kg
BMI: 26.2


  1. Hi KPO,

    I see some decrease in your weight there since your trip!! HAHA.