Stock index: Investing in Philippine Stock Exchange Index

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Warren Buffet, the most successful stock investor, has always recommended to invest in stock index. But what is a stock index? And why do the world’s wealthiest man suggest that everyday people like you and me invest in it?

These are the questions I am going to answer in this article. Besides, I have mentioned this topic so many times in the past and in other pages such as mutual fund, unit invest trust fund, variable universal life (VUL) and exchange-traded fund.

Philippine Stock Exchange

But before we talk about the stock index, let’s first talk about Philippine Stock Exchange or PSE.

PSE is the country’s marketplace for stocks. It is where stocks of big corporations and conglomerates are traded so investors can buy or sell them.

In fact if you want to buy a stock right now from, say, Jollibee , you can. All you need to do is go through a broker—(Col Financial, First Metro Securities, Unitrade, etc—and you will be given an online access to purchase Jollibee stocks.

It’s that simple.

When you acquire the stocks of these companies, you become their shareholder. You get to participate in their growth story as well as in their moments of slowdown. This is reflected on the prices of the stock. Here’s a really quick guide on how stocks can provide you earnings.

Buying the entire stock market

What if you decide to buy the entire stock market?

This can be the case when you want just to buy at least a stock from all the companies that are listed on the stock exchange. Maybe, you’d like to save time from having to choose which one would you give the most gains.

Is that possible? It is.

However, it’s going to cost you a lot. Like, really a lot. That’s because most of the time, you’re not allowed to buy just one stock from each company. There’s a minimum number that you need to purchase.

Stock index

That’s why the stock index was conceptualized. It is a list of companies that are said to represent the entire stock market. So when the worth of the entire index increases or decreases in value, it is believed that the whole market moves similarly.

You would hear the index mentioned in the news regularly. It’s because it is used as a means to understand where the market is at and how well it is performing. So if it is increasing in value, experts can point out that the market is doing well.

If it is not and instead its value is decreasing, then experts might say that a slowdown is occurring or worse a recession if it’s been going on for quite some time.

Also, it is being used as a benchmark on how well stock investments are doing. For example, Buffet usually measures his success by checking if his returns beat the index. Investment funds, traders, and investors in general similarly compare the returns of their portfolio to the index.

Philippine Stock Exchange index

In the country, the list is called the Philippine Stock Exchange index or PSEi, which can be called either just the stock index or index. It is also called PSE Composite Index or Phisix.

It is composed of the top 30 companies that are carefully selected on the basis of their being representative of the entire market. The table below shows our local stock index as of July 2019.

NoCompanyTickerPriceWeight
1SM INVESTMENTS CORPORATIONSM983.511.45%
2SM PRIME HOLDINGS, INC.SMPH37.910.58%
3AYALA LAND, INC.ALI51.957.40%
4BDO UNIBANK, INC.BDO149.46.32%
5AYALA CORPORATIONAC9705.88%
6JG SUMMIT HOLDINGS, INC.JGS69.34.80%
7MANILA ELECTRIC COMPANYMER3824.16%
8SAN MIGUEL CORPORATIONSMC174.54.01%
9BANK OF THE PHILIPPINE ISLANDSBPI924.01%
10UNIVERSAL ROBINA CORPORATIONURC1683.58%
11ABOITIZ EQUITY VENTURES, INC.AEV573.10%
12METROPOLITAN BANK & TRUST COMPANYMBT77.32.97%
13JOLLIBEE FOODS CORPORATIONJFC2752.91%
14GLOBE TELECOM, INC.GLO2,216.002.85%
15INTERNATIONAL CONTAINER TERMINAL SERVICES, INC.ICT137.72.68%
16ABOITIZ POWER CORP.AP37.42.66%
17PLDT Inc.TEL1,184.002.47%
18MEGAWORLD CORPORATIONMEG6.351.98%
19GT CAPITAL HOLDINGS, INC.GTCAP9101.89%
20LT GROUP, INC.LTG15.021.57%
21ALLIANCE GLOBAL GROUP, INC.AGI15.741.52%
22METRO PACIFIC INVESTMENTS CORPORATIONMPI4.791.46%
23ROBINSONS LAND CORPORATIONRLC27.51.38%
24DMCI HOLDINGS, INC.DMC10.681.37%
25SECURITY BANK CORPORATIONSECB186.91.36%
26PUREGOLD PRICE CLUB, INC.PGOLD45.81.28%
27BLOOMBERRY RESORTS CORPORATIONBLOOM11.61.24%
28ROBINSONS RETAIL HOLDINGS, INC.RRHI791.20%
29Semirara Mining and Power CorporationSCC24.10.99%
30FIRST GEN CORPORATIONFGEN26.850.94%

The stocks of these companies are also called blue chip. That’s because they demonstrated historical growth story and liquidity, meaning that they are bought or sold very frequently in the market.

Some companies were taken off of the list over the past years, and others would then be added in their place. Additionally, the positions may change depending on the valuation of the businesses.

You may go and read this article for a more in-depth discussion on each individual PSEi companies.

Does the PSE index change?

Yes, it does. The Philippine stock index is reviewed periodically. The Philippine Stock Exchange evaluate the companies that comprise the list, as well as how much weight each has, every six months.

According to PSE, there are three factors when they consider companies for the listing:

  • Market cap. The value of the companies should be big. It can be computed by its stock price times outstanding shares.
  • Free float. 15% of stocks must be owned by the public.
  • Liquid. It’s briskly traded in the stock exchange, belonging to the top 25%.

The most recent change was the replacement of Petron, an oil company, with Enrique Razon’s integrated gaming company Bloomberry Resorts Corporation last February 2019.

Worth of the Philippine Stock Exchange index

So what is the total value of the entire Philippine Stock Exchange index? The valuation of the country’s stock index is expressed in weighted sum of all of its component stocks.

What this means is that if someone wants to know how much is the worth of the index, they usually look at its overall weighted price. As of the end of the trading day of July 22, 2019, the stock index is at 8,246.83.

Experts and investors would track this value over time. Any increase or decrease is taken note of as well as the companies that caused the change.

How much can you earn when investing in the stock index?

Looking at the more than 30 years’ worth data since 1988, the index would’ve given investors the following return on investments (ROI). (CAGR stands for compounded annual growth rate, which is annual percentage of ROI ever year. Cumulative means how much your investment would’ve increased.)

PeriodCAGRCumulative
1 year12.11%12.11%
3 years1.01%3.05%
5 years3.78%120%
10 years12.21%317%
Since 19887.50%941%

When you invest in the stock index, it means that you buy all the companies that make up the Philippine Stock Exchange index. You acquire all the top 30 companies such as SM, Ayala, BDO, Metrobank, BPI, Semirara, etc.

So if you’ve invested P100,000 in 1988, your money would grow like it’s earning compounded interest of 7.50% every year. Equivalently, it would’ve been worth more or less P941,000 by July 2019.

By investing, you actually share in the earning potential of these companies. Over time, the composite has been on the upward trend. Just look at the above chart of its historical performance.

PSEi performance since 1988

You may read this more if you want to learn more about how your money your grow over time when invested in stock index.

Benefits of investing in the stock index

There are many advantages when investing in the stock index.

  • Easy to understand. You’re investing in blue chip stocks of the country’s top 30 corporations.
  • It’s composite so it’s diversified, lowering the risk associated with investing in just one business or one specific industry.
  • It historically beats actively managed funds.
  • These companies are actively traded, so they may be liquid. It’s relatively easy to get in and out of your investments.
  • There are many ways to invest as you may learn later such as exchange-traded funds (ETF) and managed funds like VUL, mutual funds, UITFs, etc.
  • These investment funds are passively managed since they only track the blue chip companies, lowering the fees.

Also, there may be cons that you need to consider.

  • No flexibility as the choices are restricted to only 30 companies.
  • Index funds may not have the option to limit losses in times when there is a market slowdown.
  • There is an opportunity cost as the returns are historically the average and there is no room to outperform the market.

How to invest in Philippine Stock Exchange index?

How do you invest in the stock index? There are many ways that you can buy stocks in order to duplicate the returns of the PSEi.

  1. Direct stocks
  2. Index funds
    • First Metro Philippine Equity Exchange Traded Fund (FMETF)
    • Mutual funds
    • Unit investment trust funds
    • PERA Account
    • Variable universal life (VUL)
ProsCons
Direct stocksIt’s straightforward.
Requires huge capital.
Requires periodic re-balancing.
FMETFAffordable.
Less management fees
To get out of investment, you have to sell stocks.
You need to trade through a broker.
Mutual fundsAffordable.
Convenient.
Tax-free capital gains
May have higher fees.
There’s a minimum holding period.
UITFAffordable.
Convenient.
No upfront fees.
Capital gains may be subject to tax.
May have higher fees.
PERA accountSavings program for retirement.
More control on investment.
Higher fees because of admin, custodial, or investing costs.
Holding period until age 55 years old.
VUL Combines life insurance and investment into one.Higher fees.

Direct stocks

The straightforward way to invest is to buy stocks of companies that make up the stock index. That is simple enough. Just go and open an account with any brokers, look at the 30 companies and buy their shares.

Actually, it’s harder in practice. Why? There are three things you need to understand: board lot, capital, and composition.

PSE board lot

The PSE board lot describes the minimum number of shares you can buy from a company. This number depends on the price of the stock at the time of purchase. In short, you just can’t buy one stock in every transaction. See the board lot.

PSE board lot

Capital

So, we can now compute just how much capital you need to buy minimum shares of all 30 companies. It turns out that you would need to have at least 128,266.50 pesos in buying just the minimum shares.

Security NameLast Trade PriceBoard lotTotal
ABOITIZ EQUITY VENTURES, INC.910.00109,100.00
ABOITIZ POWER CORP.56.0010560.00
ALLIANCE GLOBAL GROUP, INC.15.401001,540.00
AYALA CORPORATION51.25 10512.50
AYALA LAND, INC.36.7010367.00
BANK OF THE PHILIPPINE ISLANDS142.30101,423.00
BDO UNIBANK, INC.11.42 1001,142.00
BLOOMBERRY RESORTS CORPORATION78.5010785.00
DMCI HOLDINGS, INC.10.02 1001,002.00
FIRST GEN CORPORATION27.001002,700.00
GLOBE TELECOM, INC.2,174.00510,870.00
GT CAPITAL HOLDINGS, INC.845.00108,450.00
INTERNATIONAL CONTAINER TERMINAL SERVICES, INC.142.5010014,250.00
JG SUMMIT HOLDINGS, INC.282.0010028,200.00
JOLLIBEE FOODS CORPORATION69.7010 697.00
LT Group, Inc.15.581001,558.00
MANILA ELECTRIC COMPANY71.5010715.00
MEGAWORLD CORPORATION6.01 100601.00
METRO PACIFIC INVESTMENTS CORPORATION383.00103,830.00
METROPOLITAN BANK & TRUST COMPANY4.8010004,800.00
PHILIPPINE LONG DISTANCE TELEPHONE COMPANY “Common”45.501004,550.00
PUREGOLD PRICE CLUB, INC.26.65 1002,665.00
ROBINSONS LAND CORPORATION78.0010780.00
ROBINSONS RETAIL HOLDINGS INC.23.001002,300.00
SAN MIGUEL CORPORATION173.00101,730.00
SECURITY BANK CORPORATION980.00109,800.00
SEMIRARA MINING AND POWER CORPORATION174.90101,749.00
SM INVESTMENTS CORPORATION38.501003,850.00
SM PRIME HOLDINGS, INC.1,198.0055,990.00
UNIVERSAL ROBINA CORPORATION175.00101,750.00
Total128,266.50

PSEi composition

However, that’s not the end of it. Your portfolio must mirror the composition of the PSEi. This means that there should be more shares of SM Investment Corporation compared to, say, First Gen Corporation.

On top of that, you would need to rebalance your portfolio every six months. That’s because the PSE re-evaluates the list and may make changes periodically.

And that’s why buying direct shares is not quite as easy as it sounds or the most economical way if you want to invest in the stock index. This is in no way to discourage anyone from doing this, just know there are other more efficient ways that can achieve similar results.

Index funds

This is where the index funds come in. These are investments that are ran by fund managers. They offer the public an affordable, efficient way to invest in the stock index.

What follows below are brief introduction. For a more in-depth discussion, you can read our guide on index funds.

First Metro Philippine Equity Exchange Traded Fund

First Metro Philippine Equity Exchange Traded Fund or FMETF is a stock that contains all the stocks from the composite index. It is managed in a way that it mirrors the latter’s composition. See the table below. (Also see here a general discussion on the nature of exchange-traded funds.)

Security NamePSEi %FMETF %
SM INVESTMENTS CORPORATION13.1413.04
AYALA LAND, INC.9.949.8
SM PRIME HOLDINGS, INC.98.97
BDO UNIBANK, INC.7.097.1
AYALA CORPORATION6.656.81
JG SUMMIT HOLDINGS, INC.5.185.16
BANK OF THE PHILIPPINE ISLANDS4.34.31
UNIVERSAL ROBINA CORPORATION4.294.22
INTERNATIONAL CONTAINER TERMINAL SERVICES, INC.3.73.67
ABOITIZ EQUITY VENTURES, INC.3.673.68
METROPOLITAN BANK & TRUST COMPANY3.533.51
JOLLIBEE FOODS CORPORATION3.433.52
PHILIPPINE LONG DISTANCE TELEPHONE COMPANY “Common”2.752.99
MANILA ELECTRIC COMPANY2.292.23
GT CAPITAL HOLDINGS, INC.2.031.9
SECURITY BANK CORPORATION1.951.87
MEGAWORLD CORPORATION1.671.65
GLOBE TELECOM, INC.1.611.81
METRO PACIFIC INVESTMENTS CORPORATION1.611.6
SAN MIGUEL CORPORATION1.581.6
ROBINSONS LAND CORPORATION1.371.33
ABOITIZ POWER CORP.1.31.22
ALLIANCE GLOBAL GROUP, INC.1.171.15
BLOOMBERRY RESORTS CORPORATION1.121.14
LT Group, Inc.1.111.17
PUREGOLD PRICE CLUB, INC.1.11.14
ROBINSONS RETAIL HOLDINGS INC.1.061.04
DMCI HOLDINGS, INC.0.940.92
FIRST GEN CORPORATION0.790.9
SEMIRARA MINING AND POWER CORPORATION0.640.57

And because of this, its value closely follows that of the PSEi. In fact, you can actually see from the chart below how it approximates the returns.

The performance of FMETF and PSEi.

You can buy the FMETF stock just like the way you buy any other by going through a broker and purchasing it directly from the exchange.

And you don’t need huge capital because the stock is trading right now at about 120 pesos. Just check the board lot for the minimum number of shares that you have to purchase.

Mutual funds

Don’t know how to buy FMETF stocks? Are there no brokers near you? Then maybe mutual funds may be right for you. They are a type of investment where the money pooled from investors are used to buy assets that have the potential to grow over time.

Companies that offer mutual funds are First Metro Asset Management, Inc. (FAMI), ATRAM and others, all of which are regulated by the Securities and Exchange Commission. They allow anyone to start for as low as P50 to P5,000 initial capital.

Specifically, you’re looking for index funds. Below are the top mutual funds with the goal of tracking the index and the return on investment for the past 1 year.

Index funds (Mutual funds)1-yr return
Philippine Stock Index Fund Corp.15.66%
Philippine PSE Index Fund Inc.15.63%
Sun Life Prosperity Philippine Stock Index Fund, Inc.15.00%
PAMI Equity Index Fund, Inc.14.46%

Unit investment trust funds (UITF)

The unit investment trust funds or UITF are investment funds that are offered by banks and trust companies. They are regulated by the Bangko Sentral ng Pilipinas.

Just like mutual funds, you can actually invest in them for as low as P50 to P100,000 pesos. Below shows a list of the index funds offered by UITF companies and their 1-year ROI.

Index Funds (UITF)ROI
Atram Philippine Equity Smart Index Fund10.18%
BDO Equity Index Fund9.74%
BPI Philippine Equity Index Fund10.40%
Landbank Equity Index Fund6.49%
Metro Philippine Equity Index Tracker Fund10.28%
PNB Phil-Index Tracker Fund(Formerly Pnb Enhanced Phil-Index Reference Fund)10.07%
SB Philippine Equity Index Fund9.84%
UCPB Philippine Index Equity Fund9.88%
Unionbank Philippine Equity Index Tracker Fund Portfolio10.38%

The benefit of investing in the stock index through UITF is that it can be convenient especially when your bank offers them. You don’t have to deal with another institution that may be located away from you, which can save you time.

PERA Account

The PERA account or Personal Equity and Retirement account is the country’s verson of 401(k) retirement plan. It is established by the Republic Act No. 9505 that was passed into law in 2008.

Currently, there are three administrators allowed by the Bangko Sentral ng Pilipinas: Banco de-Oro (Unibank), Bank of the Philippine Islands (BPI) and Landbank. As of now, I can only find one index fund offered by BDO, and here’s how much you can earn from your PERA account.

Index Fund (PERA Account)TypeROI
BDO PERA Equity Index FundEquities9.25%

Variable universal life (VUL)

The variable universal life (VUL) is a life insurance plan with investment. It is a product that combines the security offered by insuring your life with the flexibility of earning through investing.

Companies such as AXA Philippines offer different variable universal life policies as well as a number of investment funds that you can choose from. For more information, it’d be better to talk to an advisor or set up an appointment with an insurer.

References