A Primer to Exchange-Traded Funds (ETF) Investing in the Philippines by Next Year (2013)

For many Filipinos who have an insatiable hunger for investments, next year (2013) may prove to be a great year indeed. Besides the stock market and the economic momentum coming off from a great performance in 2012, new opportunities are bound to come our way when the new year arrives.

For instance, we are certain that Exchange-Traded Funds or ETF will finally be launched in the Philippines. This will be a welcome option to Filipino investors given its popularity in more advanced economies such as the US.

ETF in the Philippines

According to reports, the local stock exchange has been eager to introduce ETF’s since early 2000’s but was hampered by tax concerns. However, the ETF rules were now completed by the Securities and Exchange Commission (SEC) in October 2012. This now paves the way for investment companies to finally introduce ETF’s to the Philippine market by 2013.

But before ETF’s do come in, it would be to our advantage to know all that we can about them. This will enable the investor to understand exactly what an ETF is, how it works, how it differs from existing investment funds such as mutual funds or UITF’s, what are the advantages and disadvantages of ETF’s and whether or not we should be looking forward to the launch to invest.

Answering these questions will, hopefully, make us more informed when we make our investment choices with ETF’s. So let’s begin by knowing what ETF’s exactly are.

What are ETF’s?

Every investment product has its own set of properties that makes it unique. Exchange-Traded Funds have the following characteristics you should know about so that you can differentiate it from other investment options.

An Exchange-Traded Fund:
  • is an investment fund
  • traded on stock exchanges just like stocks
  • holds assets such as stocks, bonds or commodities
  • designed to track an index
  • passively managed
Let’s get to each characteristic.

Firstly an ETF is an investment fund. This means that it pools the assets of its investors which their professional fund managers invest. Individual investors are provided with a prospectus to know all the details of a particular ETF. That makes ETF’s very similar to mutual funds.

Traded in the Stock Market & Tracking Index

But unlike mutual funds in which investors buy and sell directly from the fund, ETF’s are bought and sold in a stock exchange similar to how listed stocks work. So while mutual funds have Net Asset Value per Share (NAVPS) determined at the end of a trading day, ETF’s are continuously priced as it is traded in the stock exchange.

Just like mutual funds, shares of ETF’s represent ownership of an investment portfolio of stocks, bonds, commodities or currencies. However since ETF’s are designed to track a specific index, the composition of its portfolio is known to everyone because it copies what comprises the index it emulates. This is not the case for mutual funds since mutual fund managers vary the composition of their fund’s portfolio to what they think will provide maximum return on investment.

This is the reason why ETF’s are considered passively-managed while mutual funds are actively-managed. Both approaches have their own pros and cons but since this is an ETF discussion, let’s focus on the passively-managed ETF’s.

Advantages and Disadvantages of ETF’s

Passive management of funds such as the case for ETF’s entail the following:
  1. Requires few decision-making by the fund manager.
  2. Fund manager just duplicates the index it tracks as efficiently as he can
  3. Less management means lower operating cost which in turn should lower the fees charged to investors.
  4. It will never outperform the index it tracks.
  5. Fund managers are unable to act even if they believe the market will drop.
Based from these implications, you should see that there are both advantages and disadvantages to expect with ETF’s. Analyzing these factors in line with an investor’s goals should help in the decision-making process.

Who Are Eying to Offer ETF’s?

Several big banks and investment firms in the Philippines have expressed their intention to offer ETF’s. I’d like to summarize who they are and talk about what little information they offered regarding their plans.
  1. First Metro Investment Corporation - the investment banking unit of Metrobank has announced on Dec 3, 2012 that its board has approved the creation of an ETF which will track the Philippine Stock Exchange index. Required initial capitalization is 250 million pesos.
  2. Bank of the Philippine Islands - expressed plans to launch their ETF next year
  3. Banco de Oro Unibank - looking into offering ETF’s but have no timetable
  4. Philippine National Bank - looking into offering ETF’s but have no timetable
  5. ATR KimEng Asset Management, Inc. - looking into offering ETF’s but have no timetable
For now, we can only hope that the rollout of ETF’s next year will be a success. This will definitely add a new investment option for Filipinos to take advantage of. As investors learn more about ETF’s, they will be in a better position to make informed decisions whether to dive in or take time to wait and see.

Photo Credit: s_falkow (Creative Commons)