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If you’ve been thinking of investing in stocks but held back because you think:
A. You need more capital
B. Worried about not making the right picks
C. Have no idea how to start
Well then, I have some good news for you. There’s one other option that will allow you to test the waters of stock market investing with less money down and little experience required.
Enter: Exchange Traded Funds
What are Exchange Traded Funds (ETF)?
Let’s squeeze out a simple definition from the term itself:
An Exchange Traded Fund or ETF is a Fund (a collection of investments) that is Exchange-Traded (can be bought and sold in real-time).
If you’re familiar with how Mutual Funds work, they share the same core (each fund is a basket of various types of investments: stocks, bonds, etc.,)., except that Mutual Funds can’t be traded in real-time and ETF’s typically base its investing strategy on mimicking certain indexes or industries/sectors (more on this later).
Some consider ETFs to be a combination of Mutual Funds (allows you to invest in a basket of securities in a single trade) and Stocks (you can buy and sell ETFs in the market within stock trading hours).
Compared to stocks, investing in ETF allows for instant diversification for less money. Let’s say you want to buy shares of Ayala Corp or SM Corp. In conventional stock investing, you’d have to pay the minimum number of shares for each stock.
For example, let’s assume Ayala Corp (AC) is priced at Php800 per share while SM Corp (SM) costs Php1000 per share. The minimum number of shares of each stock is 10, which means you’ll have to buy 10 SM shares and 10 AC shares to invest.
In total, you’ll have to shell out Php8,000 for 10 shares of AC and Php10,000 for 10 shares of SM. For 18,000, you’ll own stocks of both companies.
Ok, that’s great and all—but what if you only have Php20,000 to invest (just trying your first shot at investing in the market), you’re pretty much stuck with those 2 investments until you can come up with more funds to invest and buy other stocks to spread the risk (diversify) on your investments.
This is where ETF investing comes in handy.
For the same money (Php18,000), you can invest not only SM and Ayala shares—but also shares from 28 other companies.
By simply buying shares of the ETF (which contains multiple assets and shares of different companies already), you have a cost-efficient way of diversifying your portfolio.
Here’s how it works:
An ETF company purchases shares of large, established companies that belong to a specific index or sector. An index can be thought of as a way of measuring and monitoring the performance of a specific group of investments.
It doesn’t “exist” as an actual entity, rather, it acts as a concept that provides a guideline/rule/structure for constructing a specific portfolio.
In the Philippines, the top 30 companies are publicly traded on the Philippine Stock Exchange (PSE). Its index is the Philippine Stock Exchange Index (PSEi). It tracks the performance of 30 of the biggest and most valuable companies in the country.
Exchange-Traded Fund vs. Index Fund
To readers familiar with Index Funds who might be thinking, “ETFs seem to function a lot like Index Funds.
So, how are they different from each other?”
Well, an Index Fund can be a Mutual Fund or Exchange Traded Fund. It’s constructed to follow a specific industry or index.
On the other hand, an ETF tracks indexes of a specific exchange. Examples of exchanges include the Philippine Stock Exchange, New York Stock Exchange, NASDAQ Stock Exchange, the London Stock Exchange, and many more.
But how exactly does this “tracking” happen, you ask?
Tracking is done by purchasing securities (stocks, bonds, commodities, etc.,) of the index that is being emulated/followed at a ratio that will be proportional to the index.
If you wanted to buy shares of each of the 30 companies being traded in the Philippine Stock Exchange (PSE) right now, it’s possible—-but it’s going to cost a whole lot more versus investing in an ETF that tracks the PSE Index.
The fund manager of that ETF will “copy” (as close as possible) the composition of the PSE (list of companies trading in the PSE) using a ratio that will be proportional to the weight of each company included in the PSE.
So if Ayala Corp represents, say, 7% of the entire PSEi, then the ETF fund manager will include Ayala Corp shares in the fund representing 7% (or something very close) of the whole ETF.
As you may have guessed, you gain or lose in your ETF investment based on the performance of the index it tracks. So if the ETF specifically tracks the PSEi, for example, then your investment will grow if the PSEi posts positive scores. If it’s down, then your ETF shares will reflect very similar results.
Types of ETF
Spoiler alert: There’s only one type of ETF available right now in the Philippines—-and it’s an Equity Index-type.
Before we go into details of this sole ETF in the country, let’s take a brief look at some of the most popular forms of ETF available around the world.
- Equity Index
- Foreign Currency ETF
- Sector & Industry ETF
- Commodity ETF
- Derivative ETF
- Bond ETF
FMETF – The Only ETF Available In the Philippines Right Now
The First Metro Philippine Equity Exchange Traded Fund (FMETF) is the first-ever ETF in the country.
Launched in 2013 by First Metro Investment Corporation (FMIC), they aim to give investors the option to invest in something that can provide returns that reflect that of the Philippine Stock Exchange index.
The fund is managed by First Metro Asset Management Inc (FAMI) with First Metro Securities Brokerage Corp (FMSBC) and IGC Securities as the authorized participants.
Here’s the list of underlying securities that make up FMETF:
|ABOITIZ EQUITY VENTURES, INC.||GLOBE TELECOM, INC||PHILIPPINE LONG DISTANCE TELEPHONE COMPANY |
|ABOITIZ POWER CORP.||GT CAPITAL HOLDINGS, INC||PUREGOLD PRICE CLUB, INC.|
|ALLIANCE GLOBAL GROUP, INC||INTERNATIONAL CONTAINER TERMINAL SERVICES, INC.||ROBINSONS LAND CORPORATION|
|AYALA CORPORATION||JG SUMMIT HOLDINGS, INC||ROBINSONS RETAIL HOLDINGS INC.|
|AYALA LAND, INC.||JOLLIBEE FOODS CORPORATION||SAN MIGUEL CORPORATION|
|BANK OF THE PHILIPPINE ISLANDS||LT GROUP, INC.||SECURITY BANK CORPORATION|
|BDO UNIBANK, INC.||MANILA ELECTRIC COMPANY||SEMIRARA MINING AND POWER CORPORATION|
|BLOOMBERRY RESORTS CORPORATION||MEGAWORLD CORPORATION||SM INVESTMENTS CORPORATION|
|DMCI HOLDINGS, INC.||METRO PACIFIC INVESTMENTS CORPORATION||SM PRIME HOLDINGS, INC.|
|FIRST GEN CORPORATION||METROPOLITAN BANK & TRUST COMPANY||UNIVERSAL ROBINA CORPORATION|
Pros and Cons of Exchange Traded Funds (ETF)
Let’s take a closer look at the advantages and disadvantages of investing in ETFs.
- Cost-effective diversified investment. By allowing investors to buy a basket of stocks in a single trade, it’s a low-barrier path (price-wise) towards diversified investing in the stock market. Instead of having to come up with a significantly large amount of money to invest in a per-stock basis, you can tap into the returns potential of a particular group of stocks that belong to a specific index.
- Can serve as another tool in your investment strategy. Both budding and advanced investors can use ETF in combination with other investments. You can also apply some of the most popular investing techniques and philosophies to it to like Peso-Cost Averaging, Cash equitization, and Core-satellite.
- Transparent. Information on the type of holdings an ETF has including the price and costs are disclosed via the ETF company’s website in real-time.
- Flexible. ETFs are tradeable in an exchange which means they can be bought and sold in real-time during market hours. It allows you to enter or exit the market faster during the day. There’s also no minimum holding period.
- Lower fees compared to actively managed Mutual Funds. In general, the passive nature of ETF investing allows it to be managed without needing the more hands-on approach of Mutual funds. This could result in lower management fees. There’s also no front-end and back-end load fees when it comes to entry and exit costs.
- Potential gains versus stocks could be lower. Since the basket of securities inside an ETF is a mix of multiple investments (at a weighted figure), you could miss out on the possible huge gains (and losses) of a particular stock. For example, let’s say Jollibee Foods Corp posts 10% gains on a particular trading day. While you may have Jollibee Foods Corp in your ETF too since it’s just a small part of a long list of securities in your ETF, you won’t likely “feel” its gains since the performance of your ETF will depend on the performance of the entire fund.
How to Invest in ETF in the Philippines
Since FMETF is the only available ETF in the country right now, the following section shows the steps for opening an account with First Metro Sec so you can begin buying and investing in FMETF.
- Visit https://www.firstmetrosec.com.ph/fmsec/ or https://www.firstmetrosec.com.ph/fmsec/article/625-open-an-account. Click “Open an account”.
- List of requirements:
- Tax ID Number (TIN)
- SSS or GSIS number
- Metrobank account number (for existing Metrobank customers)
- One government-issued ID with photo and signature (driver’s license, passport, Philhealth card, TIN card, Voter’s ID, Senior Citizen ID, and others)
- One proof of address (bank statement, credit card statement, electric bill, water bill, telephone bill, and other similar documents)
- Email address
- Special Case Requirements
- Complete the online registration process:
- Prepare requirements
- Complete the form
- Verify your email
- Upload documents
- Speak (via video call) with one of First Metro Sec customer representatives. Existing Metrobank account holders and those who will open an account via personal appearance can skip this part.
- Upon receipt of email notification confirming your account is active, you may begin purchasing FMETF shares online via desktop and mobile devices.
How Much is the Minimum Investment for ETF?
The Philippine Stock Exchange sets the initial capital you can invest in ETF. The minimum amount for your investment is based on the minimum board lot which takes into consideration the price of the stock.
Check out the Philippine Stock Exchange minimum board lot shown below.
As the table shows, there is no pre-declared fixed minimum investment.
What PSE has set is the least number of stocks you need to buy, depending on the price as well as the minim board lot.
For example, if the price of a stock is between ₱50 and ₱99.95, the number of shares you need to buy is at least 10.
Is ETF a Safe Investment?
As with any type of investment, ETF investing does come with risks. One can say they are safer because of the broad diversification of bonds and stocks at a much lower cost. Investors, however, should be aware of these risks. Here are some of them:
- Market risks – ETFs get the same fate as the market they track and once they go down, you cannot mitigate it directly. You should set your capital in your portfolio in a manner that will minimize exposure to this risk.
- Trading risk – This is the total cost of being an ETF portfolio owner. While cheaper than other assets, there are still costs to cover including direct trading costs, commissions, sales charges, and more.
- Methodology risks – Even ETFs that track the same market are not equal. Methodology risks are not easy to spot and investors must equip themselves with the knowledge on the fund prospectus to know the ups and downs of an investment strategy.
- Tax risks – ETFs are considered by most to be tax-efficient but that doesn’t mean they all are. If you are planning to invest, you should know that some funds are taxed differently than most, especially those that are exposed to currency markets.
How Much Can You Earn (Interest Rates Per Year)?
There’s no one definite answer as your earnings can vary and there are no guarantees. If you would base it on the Philippines ‘ historical data, it can be assumed that you can earn around 12% per annum.
However, should you decide to invest, you must be prepared for some bad years just as you anticipate fruitful years.