As part of the broader set of measures to improve the local market, the Singapore Exchange (SGX Group) has launched two related indices to track the performance of the next 50 stocks outside the flagship 30-stock Straits Times Index, based on size and liquidity.
The iEdge Singapore Next 50 Indices will be available in two variants: one weighted by market capitalisation, the other by liquidity. The benchmark Straits Times Index, or STI, which has been around since 1966, is made up of the top 30 blue chips.
Indices are used by investors as market benchmarks, and depending on the mandate of the funds, the managers often mirror their holdings according to how indices are made up and refined, and then buy or sell accordingly.
“The iEdge Singapore Next 50 Indices initiative is part of our efforts to build a more vibrant and inclusive stock market ecosystem," says Ng Yao Loong, head of equities at SGX Group. "By showcasing companies beyond the 30 largest, we are helping investors to better capitalise on the full spectrum of opportunities in Singapore’s stock market."
Ng says the indices can be a starting point for market participants to explore innovative ways of tracking the performance of different segments of the Singapore market. The Next 50 includes a good range of listed entities across different sectors, although REITs as a whole account for 17 of the 50.
SGX is not shy to flag the prominence of REITs in the Next 50. For SGX, this is a reflection of SGX as a leading REIT hub in Asia. Within the STI, eight of the 30 stocks are REITs.
See also: Hong Kong’s capital markets resurgence: Asia’s pre-eminent financial powerhouse
“The iEdge Singapore Next 50 Indices initiative is part of our efforts to build a more vibrant and inclusive stock market ecosystem," says Ng Yao Loong, head of equities at SGX Group. Photo: Albert Chua/The Edge SIngapore
Funnel for the STI
See also: Key theme: Someone wants the market higher
According to Chan Kum Kong, SGX’s head of research, most investors, especially those from overseas, are only referencing the STI, which is not an accurate reflection of the movement and participation of small- and mid-caps. SGX believes that by having this index as a reference point, market transparency and investor access can be enhanced.
Since February, after the government formally introduced the initial set of market boosting measures, headlined by a $5 billion fund to boost non-STI stocks, numerous small and mid-cap counters have gained in response.
Three asset managers have been allocated the first pool of $1.1 billion in total but they have yet to deploy the funding. Yet, in the first eight months of the year, institutional investors — supposedly the smart money — net purchased $425 million worth of small- and mid-cap stocks.
For Chan, this is an interesting development. Institutional investors are typically obligated to invest only in stocks with a certain market cap and level of liquidity and many of the stocks in the Next 50 may not meet those metrics. Now that most of these stocks have moved, some of the institutional investors with a broader mandate can probably start getting into these stocks, which is evidently happening now.
For SGX, it will be a good outcome if these Next 50 stocks gain more investors’ interest, and coupled with their own stepping up in engagement, they can then progress upwards and be a “funnel” into the STI, and help make membership of the flagship index more aspirational.
“What we're trying to do here is to track the next tier of liquid and sizable companies that are not completely featured in the existing flagship indices that we're all familiar with,” says Andrea Ip, SGX’s head of Asia index development.
For more stories about where money flows, click here for Capital Section
For the Next 50, there will be two new indices. The first is the iEdge Singapore Next 50 Index, weighted by free float market capitalisation, which is a very standard and widely adopted approach in global index construction.
The other related index, the iEdge Singapore Next 50 Liquidity weighted index, will measure the median of daily turnover over a six-month period. The measurement of liquidity, according to Ip, gives investors a different perspective on market dynamics.
Now, how did SGX come up with the 50 constituent stocks of the Next 50? First, the 30 largest companies are excluded. Next, the remaining ones must meet a certain level of liquidity, with a 15% minimum free float as well as velocity, which is a ratio of turnover, traded turnover, its size and free float market capitalisation over its expense period.
Free float and velocity are liquidity measures based on percentage thresholds. To give a clearer picture, some absolute number measurements are applied: a $100,000 daily turnover over six months, and market capitalisation of at least $100 million. Companies that cleared all four criteria are then further whittled down to the largest 50, none of which will have a weightage of more than 5% to ensure a certain level of diversity. Rebalancing will be done every quarter, in line with other major indices, says Ip.
Ahead of the launch of the indices, SGX has done back-testing stretching back 10 years. There are certain periods where the Next 50 did better than the STI.
For example, in 2019, the Next 50 outperformed the STI by 15%, lifted by REITs enjoying capital appreciation in a low-interest rate environment of that era. Since the start of this year, the Next 50 outperformed too, as investors work up a greater level of enthusiasm.
Besides measuring outperformance, SGX wants to keep close tabs on liquidity too. In the Next 50, 44 — or nearly 90% — have shown higher turnover in the latest rebalancing earlier this month, versus just 27 at the end of 2024. “It is really a strong indicator that there is a broad-based improvement in liquidity, and perhaps that's because it is generated by growing investor interest in this segment,” says Ip.
iEdge family
To be sure, creating the Next 50 indices is not something new to SGX. Under its organic, homegrown branding iEdge, the exchange has in the last decade introduced a family of other indices, each with a different focus, be it an asset class, a market, or those with a particular characteristic, such as high-yielding REITs.
“The launch of Next 50 is a natural extension of our existing iEdge Singapore thematic suite,” says Ip.
A couple of the ETFs that were created using the indices have attracted AUM of more than $100 million each, reflecting increasing investors’ interests in the Singapore market.
“With this index, we're able to observe systematically the improvements in characteristics of the market segment, in terms of turnover, in terms of performance. And we do think that it's a very timely extension to our existing thematic suite,” says Ip.
“Index launches are not efforts in isolation. We find that this brings vibrancy to the index ecosystem. And we do welcome more partnerships, more indices to profile different sectors, different flavours of the market,” she adds.
Similar to the STI, the Next 50 has a reserve list updated regularly, and for a good reason: the number of stocks that are eligible for inclusion in the index because they meet the liquidity and size criteria has been increasing. Historically, this universe hovers around 50 to 60 listed entities, sometimes dipping slightly below 50. With the market picking up smartly, this number has expanded to almost 80.
There is a Next 50 reserve list too. “We try to give more visibility and transparency into how stocks made it into the index,” says Ip. In the event an existing next 50 index component gets privatised and delisted, a replacement from the reserve list will be included right away instead of waiting till the next quarter.
One feature of the Next 50 is that each component stock will not have a weightage of more than 5% so as to maintain better diversity. When asked if a similar cap will be applied to the STI, given how there are a handful of counters with outsized weightage, and therefore a bigger tendency to move the index. The three banks together, for example, famously make up nearly half the total weight of the STI.
SGX prefers to keep the methodology of the STI for now, as it has two other partners, including FTSE, with its own set of methodology. In contrast, iEdge is SGX’s own brand, so the exchange has the flexibility to change at its end.
Meanwhile, SGX is happy to work with potential partners who are keen to launch ETFs using the indices, although the first step is to give these two indices better visibility. “The fund managers have to see whether there will be demand, whether it is feasible, and that will leave it up to their judgment, but it will be a good outcome if that happens,” says Chan. “And we do anticipate that there could be more flavours of indices coming up from the market participants."
Chan reiterates that the new indices are part of the overall push by the exchange and the government to improve the Singapore market ecosystem. Listed companies, besides growing profits, need to be more active in communicating to the wider investment community. “If all this is done right, the market will respond by buying into the story. Either price will move or volume will move, and that's where this particular Next 50 index will capture that, and therefore be able to spotlight on these guys.”
Read also: Will the 'Next 50' draw allocation from the STI component stocks?
