In this article, I’m going to talk about why it might be a better way to go when you’re saving up long term, the investments that are available in the Philippines, and their returns for the past few years.
Beating the stock index
It’s been proven that in the long term, the stock index is hard to beat. Experts like Warren Buffet, the most successful stock investor in history, suggests that ordinary people are better off investing in stock index.
Why? Because according to sources, index funds offer the most returns that only very few can match or exceed. And even when they do, they usually can’t sustain it in the long haul. One of the most famous cases is when Nobel winners were a part of the board of directors of a high-profile fund, only for it to close.
Stock index in the Philippines
The stock index is composed of the top 30 companies whose shares are traded in the Philippine Stock Exchange.
These are called blue chip companies, and you may know them already such as PLDT, Meralco, Aboitiz Power, etc. They are also called the Philippine Stock Exchange index (PSEi).
They are selected carefully because they represent the entire market. When the prices of their stocks fall, the market is said to be in decline. When they increase, then it is said that the market is on the rise.
The index funds
So if the stock index gives the most earnings in the long term, how can you start investing?
I’ve already discussed that one way is to purchase the individual stocks of all 30 companies that are part of the list. However, it’s not really something a lot of people would like to do. It would require a really big capital.
So that’s why index funds are created. They are investment funds that are managed in a way that they mirror the stock index. They achieve this by 1.) buying all 30 companies and 2.) buying them according to their weight in the index.
What do I mean by “weight” in the index? Not all companies are created equal. Some are big, some are small. In the index, businesses like SM, Ayala, and BDO make up more weight than others.
The table below is based on full capitalization based on the PSE.
|1||SM INVESTMENTS CORPORATION||SM||11.45%|
|2||SM PRIME HOLDINGS, INC.||SMPH||10.58%|
|3||AYALA LAND, INC.||ALI||7.40%|
|4||BDO UNIBANK, INC.||BDO||6.32%|
|6||JG SUMMIT HOLDINGS, INC.||JGS||4.80%|
|7||MANILA ELECTRIC COMPANY||MER||4.16%|
|8||SAN MIGUEL CORPORATION||SMC||4.01%|
|9||BANK OF THE PHILIPPINE ISLANDS||BPI||4.01%|
|10||UNIVERSAL ROBINA CORPORATION||URC||3.58%|
|11||ABOITIZ EQUITY VENTURES, INC.||AEV||3.10%|
|12||METROPOLITAN BANK & TRUST COMPANY||MBT||2.97%|
|13||JOLLIBEE FOODS CORPORATION||JFC||2.91%|
|14||GLOBE TELECOM, INC.||GLO||2.85%|
|15||INTERNATIONAL CONTAINER TERMINAL SERVICES, INC.||ICT||2.68%|
|16||ABOITIZ POWER CORP.||AP||2.66%|
|19||GT CAPITAL HOLDINGS, INC.||GTCAP||1.89%|
|20||LT GROUP, INC.||LTG||1.57%|
|21||ALLIANCE GLOBAL GROUP, INC.||AGI||1.52%|
|22||METRO PACIFIC INVESTMENTS CORPORATION||MPI||1.46%|
|23||ROBINSONS LAND CORPORATION||RLC||1.38%|
|24||DMCI HOLDINGS, INC.||DMC||1.37%|
|25||SECURITY BANK CORPORATION||SECB||1.36%|
|26||PUREGOLD PRICE CLUB, INC.||PGOLD||1.28%|
|27||BLOOMBERRY RESORTS CORPORATION||BLOOM||1.24%|
|28||ROBINSONS RETAIL HOLDINGS, INC.||RRHI||1.20%|
|29||Semirara Mining and Power Corporation||SCC||0.99%|
|30||FIRST GEN CORPORATION||FGEN||0.94%|
Thus, the fund is going to create a portfolio that mirror such composition. In this way, its returns would stay as close as possible to that of the index.
Investing in index funds
So when you invest in an index fund, what exactly happens?
Remember that the fund is going to be pooled from all investors like you. The money then is used to buy the stocks that comprise the index, which would become the assets of the fund.
The entire worth of the fund (which is asset minus costs of its operation) would then be computed, and then divided into stocks, shares or units. They will then be issued to you as proof of your ownership or participation in the investment.
Each stock, share or unit already contains all of the 30 companies. Pretty neat, huh?
Benefits of index funds
- Low initial capital. If you buy all the index stocks directly, you’d need at least P128,266.50. With index funds, you can start as low as P1,000 pesos.
- Passive income. A fund manager looks after the investments. You don’t have to be skilled in stock trading, so you can enjoy potential earnings without being an expert.
- Long-term results. Again, it’s worth repeating that it’s hard to beat the long-term results of the index.
- Low management fees. The fees are usually lower than actively managed funds.
- Diversified. Every stock, share or unit already includes the entire index, so it’s already diversified which lessens risks.
Types of index funds in the Philippines
In the Philippines, there are basically three index funds that you can invest.
- Mutual funds
- Unit investment trust funds (UITF)
- PERA account
- First Metro Philippine Equity Exchange Traded Fund (FMETF)
Index funds through mutual funds
|Index funds (Mutual funds)||1 yr. Return (%)||3 yr. Return (%)||5 yr. Return (%)|
|First Metro Save and Learn Philippine Index Fund, Inc.||4.99%||-4.14%||n.a.|
|PAMI Equity Index Fund, Inc||9.24%||0.03%||n.a.|
|Philequity PSE Index Fund Inc||10.18%||1.05%||3.44%|
|Philippine Stock Index Fund Corp.||10.23%||0.76%||3.4%|
|Sun Life Prosperity Philippine Stock Index Fund, Inc.||9.68%||0.71%||n.a.|
Mutual fund companies actually offer index funds. There are currently five such investments available according to Philippine Investment Fund Association.
Personally, I actually started with mutual funds. One of the big companies is located where I was working then. I was able to attend one of their free financial seminars.
For me, choose mutual fund when there’s one that’s located to where you are working or residing. It’s also ideal for people who would want to really talk to a rep or attend seminars for them to understand more before they get started.
Online registration is also good for those who want to start immediately and already know what they’re doing. For more info, check this brief discussion on mutual fund benefits and disadvantages.
Index funds through UITF
Next in the list are the unit investment trust funds (UITF). They are offered by UITF bank trust and trust companies. The data below shows the index funds according to UITF Philippines. However, I can only find the 1-yr return on investment (ROI).
|Index funds (UITF)||1 yr|
|Atram Philippine Equity Smart Index Fund||10.18%|
|BDO Equity Index Fund||9.74%|
|BPI Philippine Equity Index Fund||10.40%|
|Landbank Equity Index Fund||6.49%|
|Metro Philippine Equity Index Tracker Fund||10.28%|
|PNB Phil-Index Tracker Fund||10.07%|
|SB Philippine Equity Index Fund||9.84%|
|UCPB Philippine Index Equity Fund||9.88%|
|Unionbank Philippine Equity Index Tracker Fund Portfolio||10.38%|
Many years ago, I opened UITF with BPI and BDO. I think that they’re great because of the convenience of banking and investing all in one place.
To help you make a decision, here is an article on the benefits of UITF.
Index fund (PERA account)
Personal Equity and Retirement Account or PERA is our country’s version of the 401 (k) in the United States. It is geared for helping people save up for retirement.
By saying that, it is not easy to withdraw the money. The only way to enjoy the investment is you’re 55 years old, die young, or too sick, whichever comes first.
PERA accounts can be opened in any Bangko Sentral Pilipinas-licensed administrators. Currently, there are only three institutions that are granted so far: Landbank, Bank of the Philippine Islands, Banco de Oro-Unibank.
In the country there is only one index fund under PERA, and that is the BDO Equity Index Fund. It’s 1-year return is 9.25%. So if you’ve invested a year ago, this is how much it is now.
First Metro Philippine Equity Exchange Traded Fund (FMETF)
The First Metro Philippine Equity Exchange Traded Fund (FMETF) is actually a fund but its stock is traded on the Philippine Stock Exchange. It’s a cross between a managed fund and a stock.
So when you invest, you don’t go to a company like you do with a mutual fund or UITF. Instead, you open a stock broker’s account that can let you buy and sell stocks on the exchange.
Each FMETF stock that you buy already contains all of the index. Not only that, it follows the composition as close as possible. Its goal is simply track its movement, and that’s why the returns that you see in the chart below move similarly through the years.
So how much can you earn investing in FMETF? Looking at the actual performance for the past five years, you can see that FMETF may consistently exceed that of the PSEi. Which is actually good news.
|1 yr||3 yr||5 yr|
It is also something that is unexpected. Exchange traded funds in general, like FMETF, usually post lower gains or higher losses than the PSEi, and that’s because of the expenses in managing the fund.
But hey, getting more out of an investment is always welcome.
Frequently asked questions
Are index funds safe?
All index funds are highly regulated by the government. The Bangko Sentral ng Pilipinas oversee UITFs and PERA account, Securities and Exchange Commission on mutual funds and exchange traded funds, and Insurance Commission on variable universal life (VUL).
What is the advantage of owning direct stocks over index funds?
When you own stocks, you become part of the business. You get to enjoy dividends, voting right, and invitation to annual stockholders meeting. The caveat is that you would need to have the expertise to manage your portfolio as well as the capital to buy all of the index.
Index funds are cost-effective means of investing. They’re affordable and easy. The funds own the stocks, while you as an investor is part of the fund. Any dividends that the fund receive from companies are most likely reinvested to provide more value to investors.
Among the index funds, which one should you choose?
It depends on you. All of them are structured similarly, so it really boils down to convenience, minimum initial capital, facility for regular auto-invest, fees, and other factors like customer service.
Who should I go to if I want to invest in index funds?
Just go to the companies that offer them.