Best Index Funds to Invest in the Philippines

Last Updated – Nov 5, 2023 @ 12:55 pm

Imagine your kid rushing home one day, report card clutched in his arms:

Son: Tay! Ang galing ko, magugustuhan mo grades ko!
You: *Gets excited* Bakit nak, naka pasok ka ba sa Top 10?!
Son: Hindi tay, mas OK pa dun!
You: *breathing intensifies* Talaga?! Top 1 ka ba anak?! 
Son: Eto tay! *shows his card*
You: Ah….eh…. ‘nak, parang ganito din yung grades mo last quarter ah. Almost the same average.
Son: Exactly, tay! Hindi bumaba, hindi tumaas. Sakto lang…*grins*

In life, we recognize and celebrate winners. Whether its at work, school, sports, business—to win and be at the top and prove you’re the best is something we all genuinely desire.

So how come an investment vehicle that “merely” aims for average returns has become so popular among investors around the world?

Yes, I’m talking about Index Funds.

Like the imaginary kid in our story, this type of investment “wins” by hitting the average. The closer it is to that average, the better.

This article aims to answer everything you need to know about Index Funds: What they are, what they are for, why they were created, how it works, its pros and cons, how to start investing in them—-and a whole lot more. 

So without further ado, let’s begin with the most basic question:

What Are Index Funds?

An index fund is a type of fund that’s structured to track the performance and returns of a particular market or industry index. Mutual funds, Exchange Traded Funds, and UITFs can all be classified as index funds. 

Examples of an “index” include the Philippine Stock Exchange index (PSEi), which lists the top 30 companies who are publicly traded in the stock market (see table below). 

The Dow Jones Industrial Average (US) on the other hand, lists 30 blue chip stocks. Another US index, the S&P 500, tracks 500 of the largest companies listed in their stock market. 

Other types of index funds track a specific industry or sector. Some indexes focus on gold, oil, precious metals, bonds—and more.

When you buy a Dow Jones Industrial Average index fund, you’re essentially buying shares of the 30 blue chip companies included in that index.

Same goes when you buy an S&P 500 Index fund—you’ll own a portfolio of 500 stocks held in a pooled structure. When you buy a bond-themed index fund, it will list down investments/companies that are invested in bonds.

Philippine Stock Exchange Index (PSEi)

Why Index Funds Were Created

The first index fund was created in 1975 by Jack Bogle, the founder and CEO of The Vanguard Group. His invention was a way for investors to mimic a particular market’s performance but at a much lower cost than what mutual funds charge. 

The idea, according to Bogle in a 1997 speech, was to “put the shareholder in the driver’s seat (rather than sitting at the back and handing over the wheel to a fund manager for a fee).” The extremely low operating and management costs are what makes index funds different from its peers.  

For a time, people ridiculed the idea. But once the philosophy and the genius behind it was finally realized, it revolutionized the way how ordinary people and even the pros invest in the market.

Once hailed as the richest man in the planet, Warren Buffet said, “If a statue is ever erected to honor the person who has done the most for American investors, the hands down choice should be Jack Bogle.”

Types of Index Funds in the Philippines

As mentioned earlier, an index fund can be classified into different types. Here are some of your options if you want to invest in index funds in the Philippines.

• Mutual Fund

An investment fund that features pooled money from investors that will be managed by a professional fund manager. 

• UITF

Follows the same investment structure of mutual funds (pooled investments) but are offered/managed by banks. 

• ETF (FMETF)

An Exchange Traded Fund or ETF is a collection of investments that tracks indexes of specific exchanges (PSEi, NYSE, NASDAQ, etc.,) and can be traded in real-time. In the Philippines, there’s currently only one type of ETF, the First Metro Philippine Equity Exchange Traded Fund (FMETF)

• Personal Equity & Retirement Account (PERA)

Not exactly a category or type of index fund, rather, PERA it’s a retirement program that allows investors to pick certain investment vehicles that include index funds.

• Feeder Fund

It’s a type of fund that is structured to invest a majority of its assets in a single collective investment scheme (target fund). These target funds can be UITFs, Mutual Funds, or ETFs.

Types of Indexing Methods

Not all index funds are created with the exact same indexing philosophy. In this section, we’ll take a quick look at the 3 main ways an index is structured.

• Market-Cap Weighted Index

“Market Cap or Market Capitalization” refers to the total dollar/peso market value of a company’s outstanding shares of stock. You get this figure by multiplying the total number of a company’s outstanding shares by the current market price of one share.

With this concept, a larger and more valuable company (say, Apple) will have a bigger market capitalization than, for example, Dell. 

If an index fund includes both Apple and Dell in the portfolio and it uses a Market-cap weighted approach, it means you’ll see more shares/percentage of Apple stocks versus Dell since the former has a larger market cap. 

Here’s a breakdown of the PSEi according to market cap:

• Equal-Weighted Index

With this indexing method, all companies/investments within a particular index fund will have an equal distribution across the entire fund. Regardless of a company’s market cap, the portfolio will be made up of equal amounts of shares of each underlying company/investment that makes up the index fund.

• Fundamental-Weighted Index

This type of indexing method attempts to go beyond the simple concept of mimicking a particular index by selecting and weighing components based on current and quantitative ranking of company data.

It follows a rules-based model that includes sales, dividends, book value, and cash flow of a company. In short, an index fund built using this method will be comprised of stocks of companies/investments distributed within the index fund based on each company’s (performance) data.

Benefits of Investing in Index Funds

No investment vehicle is always better than another. It’s crucial to know both the strengths and weaknesses of a particular investment so you’ll know exactly how to fit and utilize it in your strategy.

Here’s a closer look at the advantages and disadvantages of investing in Index Funds.

1. Instant broad diversification

Fact: Most people simply don’t have the know-how, time, or interest to pick individual stocks. Even pros who actively buy and sell individual securities have a hard time matching the market’s performance—let alone beat it.

There’s just too many factors involved—competitive trends, the fund manager’s ability to execute plans during unexpected market shifts, the economy, among others—to forecast results with proven success and consistency. 

With index funds, the investor follows a shotgun approach by purchasing multiple baskets of funds to spread the risk.

And this is done with minimal effort from both you (investor) and the fund manager since their main goal is to simply get the fund’s composition as close to the index they are copying. 

2. Minimized costs

When it comes to investing, controlling costs is crucial. In fact, it’s one of the few things you can control. Index funds typically cost much less versus buying stocks individually.

Also, you pay a commission for each purchase or sale.  Actively managed funds pay managers to choose stocks and make trades on a regular basis, and when adding all these fund expenses up can make a considerable dent in your overall asset growth (especially with compounding factored in). 

3. Low Expense Ratio

Expense ratio is the cost of holding a fund for a year divided by how much you’ve invested in it. So let’s say you invest Php1,000 on a fund with an expense ratio of 0.8%, it means you’ll be paying 8 pesos per year to hold that fund.

Index funds generally have low expense ratios, mainly due to the less-intensive activity required from the fund manager’s end. 

4. Wide Variety of Funds to Choose From

Like regular stocks and mutual funds, there’s literally thousands of index funds type available in the world today.

And while there’s a limited selection available locally, you have the option of investing in international stocks and get access to thousands of index funds.

See: List of Philippine Mutual Funds (Performance Tracker)

5. Low Entry Capital Requirement

Want to invest in the stock market but don’t have the funds to purchase individual stocks to build a significant portfolio? Index funds investing start for as low as 1000 pesos locally. 

6. Passive Investing

Most of us interested in stock market investing simply don’t have the time, knowledge or interest to engage actively or trade on a frequent basis.

Much like an index fund’s philosophy, the investing activity required from your end when you invest in index funds is very minimal.

Also worth mentioning is that you can set it up to automatically reinvest your dividends, making it all the more convenient (and require less work) for the investor.

Owning Direct Stocks VS. Index Funds

One could argue that the potential gains on individual stock investing is significantly higher than with index funds. But while that may be true, you’re also exposed to more risk.

In general, choosing to invest Php 5,000 to buy 10 shares of a particular stock is considered riskier versus putting the same amount in an index fund that’s made up of 30 different stocks. 

Price is a big factor too, as buying individual stocks is much more expensive. If you’re a newbie investor looking to test the waters of stock market and don’t have much capital to operate with, index funds provide a lower-barrier requirement entry.

Note, however, that Index funds are not necessarily better than stocks, or vice versa. Each type of investment has its own place in an investment strategy.

Who says you can’t have both? Learn how to capitalize on each and leverage their strengths based on your risk preference.

Index Funds VS. Equities Funds

Equities funds can be defined as “type of fund that invests primarily in stocks”.

The portfolio manager mainly invests the shareholder’s money in the ownership of businesses (common stocks of publicly-traded companies). Technically speaking, an index fund can be categorized as a type of equity fund (since its underlying composition includes stocks of companies).

However, an Equity Fund follows an active investing philosophy, one that adheres to the fund manager’s goal of beating the market/index. 

In contrast, an index fund merely aims to match the returns of a particular index, which means the overall strategy for its fund managers is to simply “copy” the components of whatever index they are mirroring.

Their main difference lies on how a particular fund gets structured. Since an equity fund is primarily focused on investing in stocks, expect to see it makeup the majority of the fund. 

On the other hand, an index fund will get structured based on the type of index it is tracking.

So if its a Gold Index Fund, for example, the majority of its underlying funds will be made up of gold-related investments. If its an index fund that tracks the S&P 500, its underlying funds will be companies that make up the S&P 500.

Is it Safe to Invest in Index Funds? 

If you mean putting money in index funds as a tool for growing your assets, then the answer is Yes. In this case, it’s really no different from investing in stocks, mutual funds, ETFs, and others. 

In terms of risk, it can be considered as a safer investment relative to stocks.

However, that doesn’t mean that index funds are a guaranteed no-loss investment. You can still lose money in them—-same with all other forms of wealth-building methods mentioned earlier. 

Related: 10 Best Wealth Management Firms in the Philippines

List of Index Funds in the Philippines 

Below is a list of some of the index funds being offered in the Philippine market right now.

How to Invest in Index Funds in the Philippines

In this section, we’ll take a look at the steps for investing in different types of Index Funds.

1. FMETF

The First Metro Philippine Equity Exchange Fund (FMETF) is the first ever and only ETF available in the country (at least for now).

Minimum Investment: Depends on the minimum board lot. 
Fees: Brokers commission, PSE transaction fee, Securities Clearing Corporation of the Philippines fee (SCCP fee) 
Tax: VAT (12% of commission), an additional tax of 0.6% will be charged on top of the usual fees when you sell your shares

• Step 1: Visit https://www.firstmetrosec.com.ph/fmsec/ or https://www.firstmetrosec.com.ph/fmsec/article/625-open-an-account. Click “Open an account”. Prepare list of requirements shown in their website.
• Step 2: Complete the online registration
• Step 3: You’ll be asked to speak with a live agent for verification
• Step 4: Wait for the email confirmation advising your account is active and ready to trade.

2. PERA

A Personal Equity and Retirement Account or PERA is a voluntary investment program that aims to encourage Pinoys to save for retirement via its tax benefits.

Index fund investments like Mutual funds and UITF can be elected under a PERA account.

Minimum Investment: Php1,000 (BPI & BDO)
Fees: Administration fee, trust fee, custodian fee
Tax: Contributions and withdrawals are tax-free

• Step 1: Visit your administrator of choice (BDO or BPI).
• Step 2. You’ll be asked to complete all required documents and provide any necessary information.
• Step 3. Once all requirements are submitted, your PERA account will be activated. Instructions for funding, withdrawing, accessing and other information may vary between BDO and BPI so best to ask them directly (or visit their website) for any questions.

3. Mutual Funds

Mutual funds enable easy diversification by pooling money from investors and then having the MF company choose and manage the underlying investments.

Minimum Investment: Php5,000
Fees: Entry and management fees, sales charges and redemption fees
Tax: Earnings are tax-free

• Step 1: Go to the MF company’s website and click on its MF registration page (refer to listed websites above).
• Step 2: You might be required to answer a few questions to determine your risk profile. An MF sales agent should assist you in this stage.
• Step 3: Download the required forms and documents.
• Step 4: Submit all requirements by visiting their office or sending it via courier.
• Step 5: Fund your account once you receive confirmation/statement of account arrives.

4. UITF

Unit Investment Trust Funds operate a lot like mutual funds with their main differences being UITFs are managed by banks and the price of each unit is called NAVPU (Net Asset Value Per Unit).

Minimum Investment: Php5,000
Fees: Trust fee, sales charge
Tax: Capital gains may be subject to a 20% withholding tax

• Step 1: Visit your bank of choice for your UITF account
• Step 2: Complete their Client Suitability Assessment form 
• Step 3: Submit all requirements. You will be given a certificate of participation.
• Step 4: Once account is active, you may begin funding your account

Tips for Choosing the Best Index Funds 

Here are a couple of suggestions on how to pick your index fund investments.

1. Decide on the Type of Index Fund You Want to Invest In

The first step will be to pick the type of index fund you want to put money into. Each option has its pros and cons, the key is to weigh them according to your own investment preferences and strategies.

If you already have investments in mutual funds, for example, perhaps you might want to consider UITFs or ETF and leverage their advantages. 

2. Consider Fees and Charges

How much you pay for fees is a big factor in determining how much your investment will gain or lose.

Don’t dismiss these numbers as “too small” to affect your investments, because even “tiny” differences of 1% or 2% between two index funds could spell the difference between hundreds and thousands of gains or losses, especially when you have a considerable amount of investment.

Study the prospectus of the funds, check how much in total fees your investment will be charged, and see if there are any third-party fees not disclosed in their brochures.

In general, choosing index funds that have the lowest overall fees will give you a leg up over those with higher charges. 

3. Do Your Due Diligence

Before putting money on anything, consider the “foundation” (index) the fund was based on. There are several choices to choose from locally and each one will post relatively different performance even if they track the same index. 

“Tracking Error” refers to how much of a difference/how close the fund performed in relation to the index it is tracking. Fees are perhaps the main factor contributing to this gap.

However, it’s not uncommon for a particular index fund to post better returns than the index it’s based on, but generally speaking, you’d want something that come as close as possible to the index being tracked (since that’s the core philosophy of this type of fund)

Bottomline—-research and compare, analyze your options before you invest. 

4. Convenience Is a Factor

One reason why people don’t do things consistently is the presence of friction (stuff that makes it difficult) between the deed and the doer.

For example, you’re more likely to delay paying your electric bill if you’re only option is to pay it at a bayad center versus paying it through apps like Gcash or PayMaya. 

When it comes to investing, it’s a good idea to pick a platform that will make things as easy as possible for you.

From checking your investments to funding them, making trades, and general access, try to go with the option that provided the best balance between convenience and performance.