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), Personal Equity and Retirement Account (PERA), 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 called board lot.
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. 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.
|1||SM INVESTMENTS CORPORATION||SM||983.5||11.45%|
|2||SM PRIME HOLDINGS, INC.||SMPH||37.9||10.58%|
|3||AYALA LAND, INC.||ALI||51.95||7.40%|
|4||BDO UNIBANK, INC.||BDO||149.4||6.32%|
|6||JG SUMMIT HOLDINGS, INC.||JGS||69.3||4.80%|
|7||MANILA ELECTRIC COMPANY||MER||382||4.16%|
|8||SAN MIGUEL CORPORATION||SMC||174.5||4.01%|
|9||BANK OF THE PHILIPPINE ISLANDS||BPI||92||4.01%|
|10||UNIVERSAL ROBINA CORPORATION||URC||168||3.58%|
|11||ABOITIZ EQUITY VENTURES, INC.||AEV||57||3.10%|
|12||METROPOLITAN BANK & TRUST COMPANY||MBT||77.3||2.97%|
|13||JOLLIBEE FOODS CORPORATION||JFC||275||2.91%|
|14||GLOBE TELECOM, INC.||GLO||2,216.00||2.85%|
|15||INTERNATIONAL CONTAINER TERMINAL SERVICES, INC.||ICT||137.7||2.68%|
|16||ABOITIZ POWER CORP.||AP||37.4||2.66%|
|19||GT CAPITAL HOLDINGS, INC.||GTCAP||910||1.89%|
|20||LT GROUP, INC.||LTG||15.02||1.57%|
|21||ALLIANCE GLOBAL GROUP, INC.||AGI||15.74||1.52%|
|22||METRO PACIFIC INVESTMENTS CORPORATION||MPI||4.79||1.46%|
|23||ROBINSONS LAND CORPORATION||RLC||27.5||1.38%|
|24||DMCI HOLDINGS, INC.||DMC||10.68||1.37%|
|25||SECURITY BANK CORPORATION||SECB||186.9||1.36%|
|26||PUREGOLD PRICE CLUB, INC.||PGOLD||45.8||1.28%|
|27||BLOOMBERRY RESORTS CORPORATION||BLOOM||11.6||1.24%|
|28||ROBINSONS RETAIL HOLDINGS, INC.||RRHI||79||1.20%|
|29||Semirara Mining and Power Corporation||SCC||24.1||0.99%|
|30||FIRST GEN CORPORATION||FGEN||26.85||0.94%|
The stocks of these companies are also called blue chips. 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.
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. 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.) The table below is updated as of July 2019.
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.
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.
- Buying stocks directly from the market
- Index funds
|Direct stocks||It’s straightforward.||Requires huge capital.|
Requires periodic re-balancing.
Less management fees
|To get out of investment, you have to sell stocks.|
You need to trade through a broker.
Tax-free capital gains
|May have higher fees.|
There’s a minimum holding period.
No upfront fees.
|Capital gains may be subject to tax.|
May have higher fees.
|PERA account||Savings 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.|
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. 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.
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 Name||Last Trade Price||Board lot||Total|
|ABOITIZ EQUITY VENTURES, INC.||910.00||10||9,100.00|
|ABOITIZ POWER CORP.||56.00||10||560.00|
|ALLIANCE GLOBAL GROUP, INC.||15.40||100||1,540.00|
|AYALA LAND, INC.||36.70||10||367.00|
|BANK OF THE PHILIPPINE ISLANDS||142.30||10||1,423.00|
|BDO UNIBANK, INC.||11.42||100||1,142.00|
|BLOOMBERRY RESORTS CORPORATION||78.50||10||785.00|
|DMCI HOLDINGS, INC.||10.02||100||1,002.00|
|FIRST GEN CORPORATION||27.00||100||2,700.00|
|GLOBE TELECOM, INC.||2,174.00||5||10,870.00|
|GT CAPITAL HOLDINGS, INC.||845.00||10||8,450.00|
|INTERNATIONAL CONTAINER TERMINAL SERVICES, INC.||142.50||100||14,250.00|
|JG SUMMIT HOLDINGS, INC.||282.00||100||28,200.00|
|JOLLIBEE FOODS CORPORATION||69.70||10||697.00|
|LT Group, Inc.||15.58||100||1,558.00|
|MANILA ELECTRIC COMPANY||71.50||10||715.00|
|METRO PACIFIC INVESTMENTS CORPORATION||383.00||10||3,830.00|
|METROPOLITAN BANK & TRUST COMPANY||4.80||1000||4,800.00|
|PHILIPPINE LONG DISTANCE TELEPHONE COMPANY “Common”||45.50||100||4,550.00|
|PUREGOLD PRICE CLUB, INC.||26.65||100||2,665.00|
|ROBINSONS LAND CORPORATION||78.00||10||780.00|
|ROBINSONS RETAIL HOLDINGS INC.||23.00||100||2,300.00|
|SAN MIGUEL CORPORATION||173.00||10||1,730.00|
|SECURITY BANK CORPORATION||980.00||10||9,800.00|
|SEMIRARA MINING AND POWER CORPORATION||174.90||10||1,749.00|
|SM INVESTMENTS CORPORATION||38.50||100||3,850.00|
|SM PRIME HOLDINGS, INC.||1,198.00||5||5,990.00|
|UNIVERSAL ROBINA CORPORATION||175.00||10||1,750.00|
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.
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 Name||PSEi %||FMETF %|
|SM INVESTMENTS CORPORATION||13.14||13.04|
|AYALA LAND, INC.||9.94||9.8|
|SM PRIME HOLDINGS, INC.||9||8.97|
|BDO UNIBANK, INC.||7.09||7.1|
|JG SUMMIT HOLDINGS, INC.||5.18||5.16|
|BANK OF THE PHILIPPINE ISLANDS||4.3||4.31|
|UNIVERSAL ROBINA CORPORATION||4.29||4.22|
|INTERNATIONAL CONTAINER TERMINAL SERVICES, INC.||3.7||3.67|
|ABOITIZ EQUITY VENTURES, INC.||3.67||3.68|
|METROPOLITAN BANK & TRUST COMPANY||3.53||3.51|
|JOLLIBEE FOODS CORPORATION||3.43||3.52|
|PHILIPPINE LONG DISTANCE TELEPHONE COMPANY “Common”||2.75||2.99|
|MANILA ELECTRIC COMPANY||2.29||2.23|
|GT CAPITAL HOLDINGS, INC.||2.03||1.9|
|SECURITY BANK CORPORATION||1.95||1.87|
|GLOBE TELECOM, INC.||1.61||1.81|
|METRO PACIFIC INVESTMENTS CORPORATION||1.61||1.6|
|SAN MIGUEL CORPORATION||1.58||1.6|
|ROBINSONS LAND CORPORATION||1.37||1.33|
|ABOITIZ POWER CORP.||1.3||1.22|
|ALLIANCE GLOBAL GROUP, INC.||1.17||1.15|
|BLOOMBERRY RESORTS CORPORATION||1.12||1.14|
|LT Group, Inc.||1.11||1.17|
|PUREGOLD PRICE CLUB, INC.||1.1||1.14|
|ROBINSONS RETAIL HOLDINGS INC.||1.06||1.04|
|DMCI HOLDINGS, INC.||0.94||0.92|
|FIRST GEN CORPORATION||0.79||0.9|
|SEMIRARA MINING AND POWER CORPORATION||0.64||0.57|
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.
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.
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.
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.
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.
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.
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.
- Philippine Stock Exchange. Accessed June 22, 2019
- Wall Street Journal. Accessed June 22, 2019
- Bloomberg. Accessed June 22, 2019