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So I’ve talked about investing in index funds could be a better option when done long-term. Such claim is based on two things: expert recommendation and return over long term. Advice from experts like the highly successful stock investor Warren Buffett and the historical performance of foreign and local indices appear to provide more support to such claim.
So if Pinoys have better chances in investing in index funds, wouldn’t it be necessary to actually check which one is the best in the market?
What is the best index fund?
In a separate article, I’ve attempted to answer this question by making a comparison of fees of all index funds. You may want to read that first and then you can come back once done. There, I’ve talked about index funds in general, how they are structured, operations, and ways to invest in them.
That article was written with the hope you’d select the one with the least fee and in the process, lower your cost of investing. Fees drag your the returns of your investment funds especially that you’re doing this for passive income. However, there may be some of you who are not convinced yet so I thought of another way to compare them.
Impact of index fund fees on ROI
This time, I’m going to check the impact of these fees on your return on investment (ROI). It’s going to involve making a forecast 30 years into the future, and then see which one actually gives you higher take-home pay.
I think that this is a fair assessment. However, it’s impossible to do this on all of the index funds in the market. Not only because there is less space here, it is also not necessary.
Why? Because the fund with least fee can be handpicked from each of the following companies that offer them:
- Exchange Traded fund (ETF)
- Unit investment trust fund (UITF)
- Personal Equity and Retirement Account (PERA)
- Mutual fund
So that’s going to leave only four funds to choose from. That makes the work easier. By simply picking the fund with the lowest fee from each category, then we can assume that the rest of the funds that have higher fees would result to lower returns.
|Type||Entry fee||Mgt fee||Redemption|
|First Metro Philippine Equity Exchange Traded Fund (FMETF)||ETF||0.295%||0.50%||0.895%|
|East West PSEI Tracker Fund (EW PTF)||UITF||0.75%|
|BDO PERA Index Fund (BDO PIF)||PERA||1.0857%|
|Philippine Stock Index Fund (PSIF)||Mutual fund||1.50%||1%|
On the table, you can see the four funds namely: First Metro Philippine Equity Exchange Traded Fund (FMETF) for the exchange traded fund, East West PSEI Tracker Fund (EW PTF) for UITF, BDO PERA Index Fund (BDO PIF) for PERA, and Philippine Stock Index Fund (PSIF) for mutual fund.
As you can see, investing in FMETF requires buying its stock from the stock market. The entry fee already includes all the charges and fees associated with purchasing a stock. Similarly, you can see that the redemption also reflects charges, fees, and taxes that are to be paid when selling the stock.
The holding period and exit fee are not considered. The reason being is that this charge can be avoided. You can wait until after the holding period and then redeem your investment, and in that way you wouldn’t have to pay the fee.
On the table, the Philippine Stock Index Fund from ALFM company is chosen among mutual funds because it has the least entry fee or sales load. Now I’ve written a separate article on how to avoid paying the sales load when investing in mutual funds. In this comparison though, let’s assume that this fee has to be paid.
For BDO PIF, there is an additional 0.0857% custodian fee based on their latest KIIDS (key information and investment disclosure statement).
You may also check this link on the breakdown of FMETF fees when purchasing its stock. Take note too that I’ve already rounded off the fees when purchasing and selling the stock upon redeeming your investment.
It is important to bear in mind that there are limits in this attempt to track the impact of fees on investments. The fact that a forecast is done means that this is not going to be what funds would perform in reality. Actual results vary.
Another thing is that it is assumed that the stock index grows 7% every year. From experience, the actual gain of the top 30 Philippine blue chip companies fluctuate widely each year. It doesn’t grow as neatly as the forecasts that you see here.
Also, it is assumed that these funds won’t change their fees in the future. If and when they do, then the tables wouldn’t reflect such change.
Lastly, the comparison is only on fees and their impact on your money. It doesn’t take into account other factors such as tracking error, customer service, online access, ease of doing business with these funds, etc.
One-time P1 million index fund investment
So the first comparison is the ROI on a one-time P1 million investment. Let’s track the growth of money invested in each of the four funds for the next 30 years. A zero-fee fund is also included as a benchmark. Because it doesn’t have any fee, this fund does not exist in reality and its sole purpose is to check what the money could’ve been in the future without any charges.
In the table, here are some of the assumptions.
- Time horizon is 30 years.
- Money grows 7% each year.
- Withdrawal occurs at the end of 30 years and after the holding period, if there is any.
- Since BDO PIF has a tax credit equal to 5% of your investment, this is taken into account and assumed to be taken advantage of every year. To bring its value forward to the future, it is adjusted with inflation assumed to be 3% annually.
- The exit fee of 0.895% on FMETF stock is reflected on the total amount below.
You can also review the Google Sheet of this forecast.
|Year||Deposit||Zero fee||FMETF||EW PTF||BDO PIF||PSIF|
*The BDO PIF actually has a lower return of only 5,486,379 than the Philippine Stock Index Fund. However, it has a total tax credit of 117,828 (the future value of 50k tax credit taken on the first year) at the end of the 30 years, and this is already added on the table.
As you can see, it is clear that the fund with the least management fee tops all the other funds. The FMETF’s 30-year total amount is 14.98% lower than the benchmark, compared to EW PTF (20.22%), BDO PIF (26.38%), and PSIF (27.14%). See below the difference and its corresponding percentage. It’s interesting to see that even when PERA has tax credits, it still ranks second to the last in terms of ROI.
10K annual index fund investment
But what if you don’t have a million to invest now? Or maybe you’re reluctant to invest one-time big time?
Let’s revisit the forecast. This time, the capital is 10,000 pesos every year. Some of the funds accept lower than this, and the amount is chosen for the sake of comparison.
Again, the table has the same assumptions earlier. And you can visit this Google Sheet for the complete forecast.
|Year||Deposit||Zero fee||FMETF||EW PTF||BDO PIF||PSIF|
The BDO PERA Index Fund’s total is actually 813,303 pesos. Its total amount already includes the tax credit of 23,788 pesos.
As you can see, the total deposit at the end of 30 years is 300,000 pesos. The zero-fee column shows that in the end, the total would be 1,010,730 if the money grows 7% annually without any charges.
And again, it is clear that the fund with the lowest management fee still reports the highest ROI among all the funds. FMETF is 10.66 lower than the benchmark compared to EW PTF (13.99%), BDO PIF (17.18%), and PSIF (19.38%).
The choice of fund determines your take-home pay in the end especially when investing long-term.
From the forecast made above, the management fee has the most impact on your returns. Sadly, the management fee in local index funds are way higher than the ones found abroad. Two funds tracking US indices only charge 0.03%.
To date, the First Metro Philippine Equity Index Fund is forecast to have the highest return followed by East West PSEI Tracker Fund, BDO PERA Index Fund, and Philippine Stock Index Fund.
The tax credit of BDO PERA Index Fund gives additional benefit but its fees is still considerably impacting ROI.
This comparison only considers the forecast of long-term growth of savings. It does not include other factors such as tracking error and quality of service from these funds.