What is the best index fund in the Philippines?

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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:

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.

TypeEntry CostsMgt feeExit costs
First Metro Philippine Equity Exchange Traded Fund (FMETF)ETF0.295%0.50%0.895%
East West PSEI Tracker Fund (EW PTF)UITF0.75%
BDO PERA Index Fund (BDO PIF)PERA1.0857%
Philippine Stock Index Fund (PSIF)Mutual fund1.50%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 costs already includes all the charges and fees associated with purchasing a stock. Similarly, you can see that the exit costs also reflect charges, fees, and taxes that are to be paid when selling the stock.

Some considerations

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.

Limits

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 projection is done means that this is not going to be what funds would perform in reality. Actual results vary. The numbers you see here do not guarantee how these funds would perform in the future.

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 projection that you see here. Again the goal is not to predict the index, instead it is to measure which of the funds would yield the best return in the long run.

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, total expense ratio, 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 the maximum annual capital of P100,000, 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.
  • All returns are compared with the benchmark, which has 0% fee/

You can also review the Google Sheet of this forecast.

YearCapital0% feeFMETFEW PETFPSIFBDO PIF
11,000,0001,070,0001,061,5091,061,9751,043,4111,058,383
21,144,9001,130,1361,127,7911,105,2851,120,175
31,225,0431,203,1991,197,6861,170,8281,185,574
41,310,7961,280,9861,271,9121,240,2581,254,791
51,402,5521,363,8021,350,7391,313,8061,328,050
61,500,7301,451,9711,434,4511,391,7141,405,585
71,605,7811,545,8411,523,3511,474,2431,487,647
81,718,1861,645,7801,617,7611,561,6651,574,501
91,838,4591,752,1801,718,0221,654,2721,666,425
101,967,1511,865,4581,824,4961,752,3711,763,716
152,759,0322,551,6422,464,4182,337,3342,342,302
203,869,6843,490,2303,328,7863,117,5663,110,693
255,427,4334,774,0664,496,3214,158,2494,131,155
307,612,2556,530,1436,073,3575,546,3265,486,379
Total7,612,2556,471,6986,073,3575,546,3265,498,162

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.

Zero-Fee DifferencePercent
FMETF 1,140,557 -14.98%
EW PTF 1,538,898 -20.22%
PSIF 2,065,929 -27.14%
BDO PIF2,114,093-27.77%

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.

YearDepositZero feeFMETFEW PTFBDO PIFPSIF
110,000 10,700 10,615 10,620 10,584 10,434
220,000 22,149 21,916 21,898 21,786 21,487
330,000 34,399 33,948 33,875 33,641 33,195
440,000 47,507 46,758 46,594 46,189 45,598
550,000 61,533 60,396 60,101 59,470 58,736
10100,000 147,836 143,009 141,282 138,448 137,079
15150,000 268,881 256,009 250,936 243,336 241,573
20200,000 438,652 410,575 399,050 382,632 380,949
25250,000 676,765 621,995 599,113 567,624 566,850
30300,000 1,010,730 911,184 869,347 813,303 814,808
Total300,000 1,010,730 903,029 869,347 837,091 814,808

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%).

Zero-fee DifferencePercent
FMETF107,701 -10.66%
EW PTF141,383 -13.99%
BDO PIF173,640 -17.18%
PSIF195,922 -19.38%

Take-away

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%.

The First Metro Philippine Equity Index Fund is projected to yield returns to top the list 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.

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8 thoughts on “What is the best index fund in the Philippines?”

    1. Hi, Seph. You may check the fees of that fund and compare it to any of the funds that are comparable so that you can see the projected returns over time.

  1. Truly appreciate your analysis..As an American and Married to a Filipina and we have a 3 yr old son we are investing in a account with First Metro Securities and have a advantage since I receive dollars an exchange rate average 47.35-1.00 dollar..hes very lucky..it seems buying a condo may not be profitable but it has intrinsic value that cannot be measured in dollars..I dont buy jewelry anymore..I keep a nice simple gold bracelet a nice simple gold necklace and a G-Shock watch I love now everything is about investing..we think FMETF is great..just bought 30 shares but will average 10,000 peso every 6 months so that 20,000 a year and 100,000 every 5 years best scenario will try to increase it to 50,000 a year especially while its affordable…you always adapt your investment strategy even when investing because new ideas pop up all the time..I like stocks too..MM and DITO and Converge going public in October we think thats another growth stock.

  2. Hello! For example I will allot 10k for index fund, may I know which would be better monthly (2k for 5 month) or annual investment (10k per year) when it comes to returns?

  3. Hi! In terms of risk, would you say that ETF (i.e. FMETF) and equity index funds (e.g philequity psei index fund) would be about the same? Or are ETFs riskier than index funds, or vice versa? Thank you! 🙂

    1. Hi Patty. FMETF is also an equity index fund, so their asset portfolio is nearly alike. One risk is liquidity. Unlike other equity index funds in mutual funds and UITF where they are required to buy back or sell shares when an investor redeems or subscribes, you have to wait for someone willing to trade before you can buy or sell FMETF stocks.

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