Philippine Index Funds Part 2: Philequity and First Metro

Let's continue our review of index funds.  If you missed it you can check out Part 1.

This post features Philequity and First Metro.  First up is Philequity:

PSE Index Fund
Fund Type: Mutual Fund
Index Tracked: Philippine Stock Exchange Index
Minimum Initial Investment: P200000
Minimum Transaction: P50000
Redemption Fee:2% in the first year, 1.5% in the second year
Annual Fee:1.5%
Tracking Error:  No data

Steep investment requirements, high fees.  Not very attractive.


Next is First Metro.  This fund was actually covered in a previous post so I'll just put a summary below.

First Metro ETF
Fund Type: ETF
Index Tracked: Philippine Stock Exchange Index
Minimum Initial Investment: (Multiple of 10 shares) x NAVPU (P111.00 as of 8/8/2014)
Minimum Transaction: Same as above
Transaction Fees: Broker/trading platform dependent
Annual Fee:  < 2%
Tracking Error:  0.05%


That's it for this post.

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