Investing in Philippine ETF: A guide on exchange traded fund

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What if you can have an investment that combines the advantage of mutual fund and UITF and the power of stock trading? It is now possible with exchange traded fund, a relatively new way to earn passive income.

What is an exchange traded fund?

An exchange traded fund is like a mutual funds (MF) or a unit investment trust fund. It is an investment company that buy equities or shares of companies like PLDT, Jollibee, Aboitiz, SM, Ayala, etc.

It is valued according to the worth of all the shares it holds, and its total value is divided into stocks that are traded on the stock exchange. People can then buy these ETF stocks to invest.

ETF vs mutual funds vs UITF

Stated in another way, the ETF is structured the same way as mutual fund and UITF. The difference is the way people invest in them. In mutual funds, people invest by buying from the mutual fund company and UITF from banks or trust entities.

On the other hand, ETF investors buy stocks on the Philippine Stock Exchange. That is, it acts like a stock that can be traded.

Another difference is the way you can get your money back. In mutual fund, you redeem your shares from the MF company and in UITF, you redeem your units from the bank/trust. Both of these companies are obliged to buy them back from you and release your money that is equivalent whatever is the value of your investments.

In ETF, you simply sell your stocks on the stock market and wait for a buyer to purchase them.

Below is a table that sums up the characteristics of each fund.

InfoMFUITFETF
Regulator SEC BSPPSE, SEC
ManagerMutual fund companyBanks and trustInvestment company
InvestAgentBank/Trust repBroker
InitialP50 – P5,000P50 – P5,000Depends on price and board lot
AddP50 – P1,000P500-1,000Depends on price and board lot
StrategyPassiveMixMix
PurchaseNAVPS NAVPUIntraday market price
CostsSales load, back-end load, exit feeExit feeStock trading fees
Management feesLowerVariesVaries
RedemptionCashCashCash
DividendsNoneNoneMay be distributed

So why ETF?

An exchange traded fund was created in the past as a vehicle that carries a basket of stocks. It offers a convenient way in trading because just by buying one stock, you indirectly get to own many shares of large companies.

While this is also true with MF and UITF, the difference is that you don’t need to wait until the end of the day like what you do with determining the value of an MF stock or a UITF unit. The price of the ETF stock is reflected real-time.

How does ETF work?

So let’s answer the question, what are the features of the ETF?

Investment company

The investment company offers ETF. In the Philippines, the First Metro Investment Corporation (FMIC), a subsidiary of Metrobank Group, launched the country’s first ETF, the First metro Philippine Equity Exchange-Traded Fund (FMETF).

Who regulates?

The ETF is regulated by the Securities and Exchange Commission and the Philippine Stock Exchange.

Management

It is usually generally passive in management; meaning, its goal is usually just to match a benchmark. The FMETF for example simply follows the stock index, which is made up of the top 30 companies in the Philippines.

Fee

Managing the fund costs money, so the company passes that on to investors in the form of fees. These fees are structured into the price of each ETF stock. According to the Philippine Stock Exchange, the management fee of the FMETF is 50 basis points (0.50%) per year of the net asset value of the fund.

Trading

Purchasing and selling the ETF stock is done on the Philippine Stock Exchange. The local stock exchange is open usually on weekdays except weekends and holidays between 9:30 in the morning until 3:30pm with lunch break.

Dividends

Just like being a shareholder, once you are an investor, you may be entitled to receive dividends. This is possible when the ETF decides to distribute capital gains instead of putting them back to the business.

How do you invest in ETF?

So how do you get started investing in exchange traded fund? There are three things that you need to do.

  • Prepare minimum investment
  • Open an account with a stock broker.
  • Start trading.

Minimum investment

There is actually no pre-declared minimum investmetn. Instead, the least number of stocks you can buy would depend on the price and the minimum board lot as stated by the Philippine Stock Exchange. As you can see from the table below, when the price of a stock is between ₱100 to ₱199.99, then the minimum number of shares upon buying is 10 stocks.

PSE minimum board lot

Broker account

Next, you need to open an account with a stock broker like COL Financials, UTRADE, or First Metro Securities Inc. The broker is going to execute your request to trade. They might ask you to fill out some forms and put up a starting investment to put up.

Learning their trading platform might take some time and familiarity, but you should be able to find FMETF, the ticker symbol for First Metro Exchange Traded Fund.

Start trading ETF stocks

You can now already start trading. Again, check the board lot and buy at the the bid price you’re comfortable with.

Also, bear in mind that each time you make a transaction, either acquiring shares or selling them, you will be charged the following fees:

  • broker’s commission
  • value added tax of the commission
  • Philippine Stock Exchange transaction fee
  • Securities Clearing Corporation of The Philippines fee
  • sales tax

How is the price determined?

Any ETF has two prices:

  • its net asset value per share
  • market price

The net asset value per share (NAVPS) is computed by adding up all its assets minus liabilities divided by all outstanding shares. It publishes the NAVPS real-time as a guide to investors when acquiring shares on the stock exchange.

At the same time, ETF is subject to the same supply-demand forces that affect stocks in general. Its price is determined by the market. The more people buy it, the higher the price goes. If there are fewer, it goes down.

When the NAVPS and market value diverge, the fund manager may try to bring both prices as close as possible. This is what is called ETF arbitrage.

Benefits of exchange traded fund

The advantages of ETF are the following:

  • There are no sales load or front-end fees.
  • Stock price is reflected real-time during trading hours.
  • It’s transparent. The list of underlying assets is published and updated periodically.
  • Opening an account is easy.
  • With just one ETF stock, you get to be part of the earning potential of large companies. The fund gives you diversified portfolio.
  • It’s more convenient and cost-efficient than managing your own portfolio of individual stocks.
  • Management fees are generally lower than MF and UITF.
  • You can buy or sell stocks any time, any day for as long as the stock market is open.

And here are the disadvantages.

  • The only way to invest is through a broker.
  • There’s limited control on what companies the fund invests.
  • Buying or selling stocks trading fees.
  • Initial investment required depends on the stock price and the minimum board lot.
  • When ETF distributes capital gains in the form of dividends, earnings are subject to tax.
  • Because it is traded, its price might be overvalued with respect to the worth of its portfolio.

Before you invest in ETF

If this is the first time to invest, here are the things that you should do before you jump in.

  • Write down your financial goal and tie it with your investment. In this way, it’s attached to a personal purpose and you avoid doing it for the sake of investing.
  • Check the ETF that is available in the market today. See if it matches with what you’re looking for.
  • If it isn’t, here are other easy passive income you can learn about.
  • Make sure that you learn about the risks associated with the fund. Is it volatile? If so, how would you react when prices go down?

How much can you earn from ETF?

As what has been mentioned earlier, there is only one such fund in the Philippine, and that is the FMETF. You can read the FMETF historical earnings comparison of the historical earnings if you’ve invested one-time ₱1 million or yearly ₱100k. Please note that historical performance does not guarantee future returns.

Nevertheless, we’ve made an estimate of future earnings on any ETF. The table that you see below is based on a ₱1 million capital that is used to buy the ETF stocks and remains invested for the next ten years. The annual return on investment (ROI) ranges from 2% to 12%. Note however that there would be years where the ROI can be negative and there would be years that it can exceed what’s indicated on the table.

Fees and taxes in buying (0.295%) the stocks are included. You can also see that the total amount at the bottom of the table already includes the 0.895% total fees and taxes when selling the stocks on the exchange. Again, be reminded that this is only an estimate. Actual returns vary.

YearCapital2%4%6%8%10%12%
11,000,0001,016,9911,036,9321,056,8731,076,8141,096,7551,116,696
21,037,3311,078,4091,120,2851,162,9591,206,4311,250,700
31,058,0771,121,5461,187,5031,255,9961,327,0741,400,783
41,079,2391,166,4071,258,7531,356,4761,459,7811,568,877
51,100,8241,213,0641,334,2781,464,9941,605,7591,757,143
61,122,8401,261,5861,414,3341,582,1931,766,3351,968,000
71,145,2971,312,0501,499,1951,708,7681,942,9682,204,160
81,168,2031,364,5321,589,1461,845,4702,137,2652,468,659
91,191,5671,419,1131,684,4951,993,1082,350,9922,764,898
101,215,3981,475,8781,785,5652,152,5562,586,0913,096,686
Total1,000,0001,204,5211,462,6681,769,5842,133,2912,562,9453,068,971

The table below shows estimate if ₱100K annually is invested.

YearCapital2%4%6%8%10%12%
1100,000101,699103,693105,687107,681109,676111,670
2100,000205,432211,534217,716223,977230,319236,740
3100,000311,240323,689336,466349,577363,026376,818
4100,000419,164440,329462,341485,224509,004533,706
5100,000529,246561,636595,769631,724669,580709,420
6100,000641,530687,794737,203789,943846,213906,220
7100,000756,060818,999887,122960,8201,040,5101,126,636
8100,000872,880955,4531,046,0371,145,3671,254,2371,373,502
9100,000992,0371,097,3641,214,4861,344,6781,489,3361,649,992
10100,0001,113,5771,244,9521,393,0431,559,9331,747,9451,959,660
Total1,000,0001,103,6101,233,8091,380,5751,545,9721,732,3011,942,121

How do you redeem investment?

When you want to get your money back, all you have to do is sell your shares. You get your investment once you a buyer is willing to purchase them at a price that you set. The exchange of shares between you and the buyer all happen on the stock market.

How do you know your earnings?

So how do you determine if you’ve gained or not? What is one way to compute your earnings? The trading platform of your broker must be able to tell you at a glance your (un) realized profit or loss.

However, if you want to know and do the math by yourself, then you can deduct the price you sold the stocks from the price when you bought it and then multiply the result with the number of shares.

References

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4 thoughts on “Investing in Philippine ETF: A guide on exchange traded fund”

  1. Thanks for this sir! Question lang po, is it possible na walang bumili ng ETF mo if mag sesell ka, wala syang ibang way to convert sa cash?

      1. Additonal question. So if I would rely on it for my retirement (30 years investing horizon). I need to wait for someone to buy all of my stocks that I accumulated over the years? What are the chances that nobody will buy the stocks I gained?

      2. Hi, Res. You can divest and get your money back when someone buys your stocks. To your second question, it depends on the liquidity (how easy it is to pull your money out from the stock market, which depends on the number of buyers willing to pay the price of the stock that you’ve set) at the point when you’re selling your stocks. Liquidity is subject to a lot of factors: how attractive ETF stocks are, supply-demand, the overall market environment, etc.

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