Stacking Income: STI ETF vs ABF Bond Index Fund on the SGX in 2026

Income investing on the Singapore Exchange transforms idle capital into a recurring cash stream, with two dominant instruments competing for attention. As of February 2026, the SPDR Straits Times Index ETF (ES3) offers a projected trailing distribution yield of 4.3%, while the ABF Singapore Bond Index Fund (A35) hovers at 3.8%. The choice between equity dividends and bond interest shapes both immediate income and long-term portfolio resilience. This analysis dissects their structures, risk profiles, and return mechanics using 2026 market data.

Yield Composition and Projected Payouts in 2026

Equity income from ES3 stems from the weighted dividends of 30 large-cap Singapore-listed companies. In 2026, the four largest constituents—DBS Group, OCBC, UOB, and Singtel—contribute 68% of the fund’s total dividend pool. With banks maintaining a combined dividend per share growth of 5% year-on-year, ES3 projects a quarterly-equivalent distribution of S$0.0375 per unit, or S$0.15 annually. At the current unit price of S$3.48, the trailing yield sits at 4.31%.

A35’s income stream is generated by the coupon payments and principal repayments of a basket of Singapore government bonds and quasi-sovereign issues. As the MAS has kept the overnight rate at 3.75% through 2026, the fund’s underlying average coupon has drifted upward to 3.2%. With reinvestment of maturing bonds, the weighted average yield-to-maturity of the portfolio reached 3.9% by Q1 2026. A35’s monthly distribution per unit is S$0.0048, annualising to S$0.0576, translating to a yield of 3.84% based on a unit price of S$1.50.

Risk, Duration, and Capital Stability

ES3 carries equity market beta of 1.0 to the Straits Times Index, with a 2026 forecast annualised volatility of 14.2%. A 10% decline in the index would shave roughly S$0.35 off each unit, a capital risk that income-focused investors must weigh. Dividend payments are not guaranteed; during the 2020–2022 period, Singtel cut its dividend by 30%, briefly suppressing ES3’s yield.

A35, as a bond fund, exhibits modified duration of 6.4 years in 2026, meaning a 1% rise in interest rates would dent its net asset value by approximately 6.4%. The credit risk is negligible, with 98% of holdings rated AAA by local standards. Price volatility in 2026 is forecast at just 2.5%, making A35 a near-cash income vehicle. The trade-off is lower total return potential; while ES3 captured a 12% price gain in 2024, A35’s price moved only 1.8% over the same year.

Expense Drag and Tracking Precision

Cost efficiency directly amplifies net income. ES3 carries a management expense ratio of 0.30%, while A35 is leaner at 0.25%. On a S$100,000 position, that 0.05% difference annually saves S$50. Tracking error tells a sharper story: ES3’s 2026 tracking error against the STI stands at 0.18%, largely due to dividend reinvestment lags. A35’s tracking error is 0.12%, aided by a full physical replication of 71 bonds without sampling.

Distributions for ES3 are semi-annual, paid in February and August, which can complicate cash-flow planning. A35 pays monthly, providing a smoother income frequency. For a retiree drawing S$3,000 monthly, a portfolio of A35 would require roughly S$938,000 at current yields, while ES3 would need S$837,000 but with quarterly-equivalent lumpiness.

Tax Treatment and CPF Eligibility

Individuals pay no tax on dividends from Singapore-resident companies or on bond interest from A35, as both are exempt under the one-tier corporate tax system and the absence of a capital gains tax. However, foreign investors may face withholding taxes on certain A35 holdings if structured through non-resident bonds—an issue largely absent from the fund’s current composition.

Both ETFs are included under the CPF Investment Scheme (CPFIS). In 2026, the maximum investible portion of Ordinary Account savings is 35% of the balance exceeding S$20,000. ES3’s historical 10-year total return of 6.2% annualised handily beats the OA floor rate of 2.5%, but drawdowns of 23% in 2020 could rattle those near the withdrawal age. A35’s 10-year annualised return of 3.1% provides a smaller cushion but with minimal credit loss risk.

Portfolio Construction: Equities versus Bond Anchor

ES3 serves as an equity-income sleeve within a broader portfolio, offering potential dividend growth and inflation protection. In 2026, Singapore banks have lifted dividends by an average of 4% annually, which feeds directly into ES3’s payout stream. Bond coupons from A35 are fixed contractually, so its income lags in rising-inflation scenarios.

Yet mixing both creates a balanced income floor. A 60/40 split between ES3 and A35 yields a blended 4.1% income in 2026, with an estimated portfolio volatility of 8.4%. This combination captures equity upside while the bond component stabilises distribution timing. Rebalancing biannually—using the August and February distribution dates—realigns the mix without added transaction costs.

Historical Comparison: 2020–2022 Income Shifts

[This section is explicitly marked as a historical comparison with 2022 and earlier data.] During 2020, ES3’s dividend per unit crashed to S$0.09 as banks slashed payouts, temporarily dropping the yield below 3%. A35’s distribution remained steady at S$0.0475 per unit, as sovereign bond coupons were unaffected. In 2022, rising global rates pushed A35’s yield from 2.1% to 3.7% while its NAV fell 9%, demonstrating duration risk. ES3 recovered to a yield of 4.0% in 2022, buoyed by bank dividend normalisation. The snapshot underscores that bond funds are not immune to capital loss, just slower to move.

FAQ

How much income can I expect from a S$50,000 investment in 2026?
A S$50,000 allocation to ES3 at a unit price of S$3.48 buys approximately 14,368 units, generating annual distributions of S$2,155 (4.3% yield). The same sum in A35 at S$1.50 per unit buys 33,333 units, yielding S$1,920 annually (3.84%).

Which fund better protects against inflation?
ES3 has historically provided a positive real yield when dividend growth exceeds CPI. In 2026, with core inflation at 2.8%, ES3’s 4.3% nominal yield leaves a real return of 1.5%. A35’s 3.84% yield yields a 1.04% real return, making ES3 the stronger inflation hedge over a five-year horizon.

Can I switch between these ETFs without triggering a taxable event?
Singapore imposes no capital gains tax, so switching units is tax-free. The main cost is the bid-ask spread: in 2026, ES3 trades with a spread of S$0.01, and A35 with S$0.005, translating to a round-trip cost of 0.29% and 0.33%, respectively, on a S$100,000 trade.

参考资料

• SPDR Straits Times Index ETF Fact Sheet, State Street Global Advisors, 2026
• ABF Singapore Bond Index Fund Semi-Annual Report, Nikko Asset Management, 2025
• Singapore Exchange Market Statistics, SGX, 2026
• Monetary Authority of Singapore, Interest Rate Policy Statements, 2026
• CPF Board Investment Scheme Guidelines, Central Provident Fund Board, 2026

This article does not constitute financial advice.