First Metro ETF

In the last post I wrote about exchange-traded funds.  This post will be about the first (and as far as I can tell, the only) ETF in the Philippines: First Metro Philippine Equity Exchange-Traded Fund (FMETF).

The Fund aims to  track the performance of the Philippine Stock Exchange Composite Index (PSEI).  This means, roughly, that it will invest in the stocks that comprise the PSEI, in the same weights.

A listing of the PSEI component securities can be found on the PSE website.

Due to its nature as an index fund, and according to the prospectus itself, the Fund is passively-managed. Theoretically, this should mean lower operating costs and thus higher returns for the investor. However, the expense ratio listed for the fund is =< 2%. 2% is pretty high for an index fund. In other countries annual fees for index funds are usually below 1%. In comparison, BPI's equity index funds charge 1.5%.

On the other hand, the 2% listed is a maximum. The actual amount may be lower. Unfortunately I couldn't find any information about the actual expense ratio. I will update this post when I do.

Another thing to look at when reviewing an index fund is the tracking error.  Tracking error is the difference between an index fund's performance and the index's own performance.  Tracking error should be as close to 0% as possible.  The currently listed tracking error for FMETF is 0.09% which is a lot better than the ~1% achieved by BPI's index funds.

FMETF is interesting if you want to track the PSEI and at the same time be able to trade fund shares like any other stock.  However, it would be a good idea to research the actual expense ratio (roughly equivalent to mutual fund/UITF annual fee) and broker's fees first.

Exchange Traded Funds

Some months ago I came across a news article discussing the first exchange-traded funds (ETFs) available to local investors.  At the time I wasn't actively blogging (or even investing) so I didn't take too much notice.  I think now would be a good time to educate myself by reading up on ETFs and writing a blog post.

From Investopedia:

A security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange. ETFs experience price changes throughout the day as they are bought and sold.

Much like a mutual fund or a UITF an ETF pools investors' money and invests it in assets such as stocks or bonds.  The main difference is that ETF shares (or units) may be bought or sold throughout the day on an exchange (such as the Philippine Stock Exchange).

The ETF share price behaves just like other stock prices, varying as they are bought and sold.  Thus investors are able to buy and sell shares at prices other than the NAVPS, unlike mutual funds and UITFs.  However, investors pay broker's fees for every trade (purchase or sale) of ETF shares.

Investors in ETFs may also use the same strategies stock traders do, such as short-selling and margin trading (see notes below), along with all the potential rewards and risks of those strategies.

Since ETFs track indices (such as the PSEI), the fund itself doesn't need to buy or sell assets often, unless the composition of the index changes.  Theoretically, this should translate to lower operational costs and lower fees for investors.

So, the most important question:  who should invest in ETFs?

Investors who:

• want the advantages of index funds (post to come later)
• want the flexibility of being able to sell ETF shares like stocks (more at Stocks vs. Equity Funds)
• don't plan on cost-averaging with small amounts.  Broker's fees will quickly eat into smaller investment amounts 

That's it for this now.  In the next post, we'll take a look at First Metro's ETF.

Update:  Post about First Metro Philippine Equity ETF is now up.

Notes: 

Short-selling: selling shares not owned by the seller.
Margin trading: borrowing money from a broker to purchase shares.

More at Investopedia:

ETFs
Short-selling
Margin-trading

BPI Regular Subscription Plan

If you've been reading this blog or other resources about personal finance you're probably familiar with cost averaging.  If not, you can read my initial post about it here and another post with a detailed example here.

One of the challenges of cost-averaging is finding the time and effort to do it regularly.  (It's a bit like blogging that way.)  Fortunately several banks and financial institutions have introduced mechanisms to make cost-averaging easier.

One of these is BPI's Regular Subscription Plan.  It's a program that allows investors to set an amount and frequency for periodic investments.  Of course this assumes that 1) you have a BPI bank account and 2) you've already invested in at least one of their funds.

Basically, you tell BPI how much and how often you want to invest and the fund you want to invest in then 'forget' about it.  The amount should meet the minimum required, which varies from fund to fund.  The frequency may be monthly or quarterly.  You also specify when the plan should start and end.  For example, you can set your plan to invest P2500 quarterly in their Short-Term fund from June 12, 2014 to June 12, 2024.

You can enroll in a Regular Subscription Plan through BPI branches or online on http://www.bpiexpressonline.com/.   If you invest or plan to invest in BPI's funds I think this is a great way to do cost-averaging.  You can learn more by reading the offical FAQs.

UITF vs. Mutual Funds, Revisited

A few years back I wrote a post comparing UITFs and Mutual Funds here.

I think it's time to update that comparison.
Here's a summary of the changes from the last article:

• UITF subsequent investment amount can be as low as P1000
• some UITFs now allow partial redemption
• Mutual fund website URL has changed

Verdict is still the same: UITFs win.  The combination of low fees, short holding periods, and now the ability to invest and redeem partial amounts make UITFs a clear winner over mutual funds.
Still, don't count mutual funds out of your diversification strategy.

Here's the complete comparison.  Asterisks denote items that have been updated:

1. Government Regulatory Agency:

UITFs - Bangko Sentral ng Pilipinas
Mutual Funds - Securities and Exchange Commission
Winner: tie

2. Issuing Companies:

UITFs - Banks
Mutual Funds - Insurance companies, investment companies
Winner: tie

3. Fund Types:

Both offer the essentially the same fund types: money market, bond, balanced, equity.
Winner: tie

4. Risk:

Since both have the same types of investments the risks are the same.
Winner: tie

5. Minimum Investment Amount:

UITFs - as low as P10,000
Mutual Funds - as low as P5,000
Winner: Mutual Funds

6. Subsequent Investment Amount*:

UITFs - as low as P1,000
Mutual Funds - as low as P1,000
Winner: tie

7. Front-end Sales Load:

UITFs - None
Mutual Funds - As low as 0%
Winner: UITFs

8. Holding Period:

UITFs - As low as 0 days
Mutual Funds - As low as 0 days if front-end load is charged
Winner: UITFs

9. Back-end Sales Load:

UITFs - None, if redemption is made after the holding period
Mutual Funds - As low as 0%, if redemption is made after the holding period
Winner: tie

10. Partial Redemption*:

UITFs - Allowed
Mutual Funds - Allowed
Winner: tie

11. Management Fee:

UITFs - As low as 0.25%
Mutual Funds - As low as 1%
Winner: UITFs

12. Website*:

UITFs - uitf.com.ph - has a lot of information
Mutual Funds - pifa.com.ph - not much information aside from NAVPS performance
Winner: UITFs

Rewards Programs

A rewards program can be a good way to save money.  You can even think of it as making a bit of extra money.
I'm enrolled in the rewards program of a certain bank.  Spending at certain establishments earns me points at the rate of 1 point for every P400 spent.  I can then spend those points with 1 point being equivalent to P1.
Now, getting P1 back for every P400 spent doesn't save siginificant amounts, but every little bit counts.  Also, there are other ways I earn points.  The bank awards a certain number of points monthly, depending on the account balance.  For money (such as emergency funds) that needs to be put in low-risk vehicles a savings account with a rewards program might be a good choice.
Another way I earn points is through bill payments.  I find this is a particularly nice way to earn points since

1. I'm going to pay the bills anyway, points or no points.
2. Points are awarded at a higher rate than for other payments.

You might be wondering if the rewards program is worth it.  In my case, it is.  Having the rewards card hasn't really changed my buying patterns: I buy the same stuff as I would without it.  So what's changed?  Well, now, because I can buy stuff with points, I essentially get stuff for free.  In the past couple of years most of the light bulb replacements (3 or 4 LED-types) I've bought have been paid for with points.  Not awesome but pretty satisfying.
There are of course, things to look out for when participating in a rewards program.  These will make the difference between saving/earning and losing money on the program.

1. Check the fees.  If fees eat up most (or more!) of the points rebates, that's a losing proposition.
2. Check prices in participating establishments.  Switching stores just to earn points doesn't make sense if the new store has higher prices.  Same argument for switching to a store that isn't conveniently located.
3. Don't fall into the trap of spending more just to get points.

Hope this helps.