Index Funds
Index funds are low-cost, efficient way in investing in the stock index. But what is an index fund? In this article, I’m going to talk about why it might be a better way to go when you’re saving up long term, the investments that are available in the Philippines, and their returns for the past few years.
Stock index in the Philippines
The stock index is composed of the top 30 companies whose shares are traded in the Philippine Stock Exchange. These are called blue chip companies, and you may know them already such as PLDT, Meralco, Aboitiz Power, etc. They are also called the Philippine Stock Exchange index (PSEi). They are selected carefully because they represent the entire market. When the prices of their stocks fall, the market is said to be in decline. When they increase, then it is said that the market is on the rise.
Why invest in the stock index
It’s been proven that in the long term, the stock index is hard to beat. Experts like Warren Buffet, the most successful stock investor in history, suggests that ordinary people are better off investing in stock index.
Why? Because according to sources, index funds offer the most returns that only very few can match or exceed. And even when they do, they usually can’t sustain it in the long haul. One of the most famous cases is when Nobel winners were a part of the board of directors of a high-profile fund, only for it to close.
The equity index fund
So if the stock index gives the most earnings in the long term, how can you start investing? I’ve already discussed that one way is to purchase the individual stocks of all 30 companies that are part of the list. However, it’s not really something a lot of people would like to do. It would require a really big capital.
So that’s why index funds are created.
They are investment funds that are managed in a way that they mirror the stock index. They achieve this by 1.) buying all 30 companies and 2.) buying them according to their weight in the index. What do I mean by “weight” in the index? Not all companies are created equal. Some are big, some are small. In the index, businesses like SM, Ayala, and BDO make up more weight than others.
The table below is based on full capitalization based on the PSE.
| NO | COMPANY | TICKER | WEIGHT |
|---|---|---|---|
| 1 | SM INVESTMENTS CORPORATION | SM | 11.45% |
| 2 | SM PRIME HOLDINGS, INC. | SMPH | 10.58% |
| 3 | AYALA LAND, INC. | ALI | 7.40% |
| 4 | BDO UNIBANK, INC. | BDO | 6.32% |
| 5 | AYALA CORPORATION | AC | 5.88% |
| 6 | JG SUMMIT HOLDINGS, INC. | JGS | 4.80% |
| 7 | MANILA ELECTRIC COMPANY | MER | 4.16% |
| 8 | SAN MIGUEL CORPORATION | SMC | 4.01% |
| 9 | BANK OF THE PHILIPPINE ISLANDS | BPI | 4.01% |
| 10 | UNIVERSAL ROBINA CORPORATION | URC | 3.58% |
| 11 | ABOITIZ EQUITY VENTURES, INC. | AEV | 3.10% |
| 12 | METROPOLITAN BANK & TRUST COMPANY | MBT | 2.97% |
| 13 | JOLLIBEE FOODS CORPORATION | JFC | 2.91% |
| 14 | GLOBE TELECOM, INC. | GLO | 2.85% |
| 15 | INTERNATIONAL CONTAINER TERMINAL SERVICES, INC. | ICT | 2.68% |
| 16 | ABOITIZ POWER CORP. | AP | 2.66% |
| 17 | PLDT Inc. | TEL | 2.47% |
| 18 | MEGAWORLD CORPORATION | MEG | 1.98% |
| 19 | GT CAPITAL HOLDINGS, INC. | GTCAP | 1.89% |
| 20 | LT GROUP, INC. | LTG | 1.57% |
| 21 | ALLIANCE GLOBAL GROUP, INC. | AGI | 1.52% |
| 22 | METRO PACIFIC INVESTMENTS CORPORATION | MPI | 1.46% |
| 23 | ROBINSONS LAND CORPORATION | RLC | 1.38% |
| 24 | DMCI HOLDINGS, INC. | DMC | 1.37% |
| 25 | SECURITY BANK CORPORATION | SECB | 1.36% |
| 26 | PUREGOLD PRICE CLUB, INC. | PGOLD | 1.28% |
| 27 | BLOOMBERRY RESORTS CORPORATION | BLOOM | 1.24% |
| 28 | ROBINSONS RETAIL HOLDINGS, INC. | RRHI | 1.20% |
| 29 | Semirara Mining and Power Corporation | SCC | 0.99% |
| 30 | FIRST GEN CORPORATION | FGEN | 0.94% |
Thus, the fund is going to create a portfolio that mirror such composition. In this way, its returns would stay as close as possible to that of the index.
Investing in equity index funds
So when you invest in an index fund, what exactly happens? Remember that the fund is going to be pooled from all investors like you. The money then is used to buy the stocks that comprise the index, which would become the assets of the fund.
The entire worth of the fund (which is asset minus costs of its operation) would then be computed, and then divided into stocks, shares or units. They will then be issued to you as proof of your ownership or participation in the investment. Each stock, share or unit already contains all of the 30 companies. Pretty neat, huh?
Benefits of index funds
There are many advantages of index fund investing including the following benefits.
- Historically, according to numerous studies, the returns of index funds beat actively managed funds over time.
- Low initial capital. If you buy all the index stocks directly, you’d need at least P128,266.50 and that’s just a stock of each company. One index fund share already contains a portfolio of the blue chip companies, and you can start investing in the fund with
- Passive income. A fund manager looks after the investments. You don’t have to be skilled in stock trading, so you can enjoy potential earnings without being an expert.
- Long-term results. Again, it’s worth repeating that it’s hard to beat the long-term results of the index.
- Low management fees. The fees are usually lower than actively managed funds.
- Diversified. Every stock, share or unit already includes the entire index, so it’s already diversified which lessens risks.
Types of index funds in the Philippines
In the Philippines, these are the available companies that offer index funds.
- Mutual funds
- Unit investment trust funds (UITF)
- PERA account
- First Metro Philippine Equity Exchange Traded Fund (FMETF)
- Variable universal life (VUL) plan
Top index funds in the Philippines in 2019
These are the top 10 index funds from January 2019 until December 2019 or until the first trading day of 2020. The FMETF stock is highest on the list with 5.61% followed by East West PSEI Tracker Fund at 5.38%.
| TYPE | FUND NAME | ROI |
|---|---|---|
| ETF | First Metro Phil. Equity Exchange Traded Fund, Inc. | 5.61% |
| UITF | EastWest PSEI Tracker Fund | 5.38% |
| Mutual fund | Philequity PSE Index Fund Inc. | 5.34% |
| Mutual fund | Philippine Stock Index Fund Corp. | 5.27% |
| UITF | BPI Philippine Equity Index Fund | 4.96% |
| Mutual fund | Sun Life Prosperity Philippine Stock Index Fund, Inc. | 4.87% |
| UITF | Metro Philippine Equity Index Tracker Fund | 4.87% |
| UITF | UnionBank Philippine Equity Index Portfolio | 4.70% |
| UITF | PNB PHIL-INDEX TRACKER FUND | 4.67% |
How to start investing in index funds?
So how can you invest in index funds that are available in the Philippines? I am going to exclude VUL from the discussion. The fee structure and its management can be quite complex, and discussing its investment component alone might not be enough to describe its features comprehensively.
Fees, charges and taxes for index funds
I’m going to discuss two different set of features for index funds, one for investment funds in general and another for exchange traded fund like FMETF. That’s because FMETF, although it is an investment fund, is traded like a stock, and that means that while it may share similar characteristics investing in it is quite different.
So let’s start with the investment funds such as mutual funds, UITF and PERA. (If you need to understand the structure of each, you may visit their respective links.) Generally, they have the following features:
- Initial investment or starting capital is the amount that the fund requires you to put up in order to open an account.
- Additional investment is the required amount if you choose to add to your investment later on.
- Sales load (front-/back-end fee) is the fee charged every time that you invest. It is also called front- or back-end fee depending on the timing when it is charged. Only mutual funds have sales load, while those in UITF and PERA are waived.
- Management fee is what the fund charges to pay the operation of the fund and compensation for fund manager/s.
- Minimum holding period is a length of time you are expected to let your money stay invested.
- Exit fee is charged when you redeem your shares within the minimum holding period.
| NAME | TYPE | INITIAL | ADD | FEE | HOLD | EXIT | SALES LOAD |
|---|---|---|---|---|---|---|---|
| FMETF | ETF | 1,000 | 1,000 | 0.50% | 0.90% | 0.30% | |
| UCPB Philippine Index Equity Fund | UITF | 1,000 | 1,000 | 0.75% | 30 calendar days | 5% | |
| EastWest PSEI Tracker Fund | UITF | 10,000 | 1,000 | 0.75% | 30 calendar | P500.00 or 0.25% of redemption proceeds, whichever is higher | |
| Philequity MSCI Philippine Index Fund, Inc. | Mutual fund | 1,000 | 500 | 1.00% | 90 days | 3% | 5.00% |
| Philippine Stock Index Fund Corp. | Mutual fund | 5,000 | 1,000 | 1.00% | 3months | 1% | 1.50% |
| Sun Life Prosperity Philippine Stock Index Fund, Inc. | Mutual fund | 1,000 | 1,000 | 1.00% | 6months | 1% | 2.00% |
| CTBC Bank – Sun Life Philippine Stock Index Feeder Fund | UITF | 10,000 | 10,000 | 1.00% | 30 calendar | 1.00% | |
| Security Bank Equity Index Fund | UITF | 10,000 | 5,000 | 1.00% | None | None | |
| UnionBank Equity Index Fund | UITF | 50,000 | Not applicable | 1.00% | 30 calendar days | 0.25% or 500, which is higher | |
| PNB Enhanced Phil-Index Reference Fund | UITF | 10,000 | 10,000 | 1.00% | 30 calendar days | 50% of income earned | |
| Metro Philippine Equity Index Tracker Fund | UITF | 25,000 | 25,000 | 1.00% | 7 calendars | 50% of income earned | |
| BDO PERA Equity Index Fund | PERA | 1,000 | 1,000 | 1.00% | 30 calendar days | 1% | |
| BDO EQUITY INDEX FUND | UITF | 10,000 | 10,000 | 1.00% | 30 calendar | 0.50% of the Original Participation Amount | |
| BPI Philippine Equity Index Fund | UITF | 10,000 | 1,000 | 1.00% | 0 calendar | None | |
| BDO PERA EQUITY INDEX FUND | UITF | 1,000 | 1,000 | 1.00% | 30 calendar | 1.00% of the Original Participation Amount | |
| PAMI Equity Index Fund, Inc. | Mutual fund | 1,000 | 500 | 1.12% | 6months | 1% | 3.36% |
| Land Bank Equity Index Fund | UITF | 5,000 | 1,000 | 1.50% | 30 calendar days | 25% of income earned | |
| Philequity PSE Index Fund Inc. | Mutual fund | 1,000 | 500 | 1.00% | 1yr | 1% | 3.50% |
Index funds through mutual funds
Mutual fund companies actually offer index funds. There are currently five such investments available according to Philippine Investment Fund Association. Personally, I actually started with mutual funds. One of the big companies is located where I was working then. I was able to attend one of their free financial seminars.
For me, choose mutual fund when there’s one that’s located to where you are working or residing. It’s also ideal for people who would want to really talk to a rep or attend seminars for them to understand more before they get started. Online registration is also good for those who want to start immediately and already know what they’re doing. For more info, check this brief discussion on mutual fund benefits and disadvantages.
Here are the best performing index funds offered through mutual funds in the Philippines in 2019. (As a reminder, past performance does not guarantee future results.)
| COMPANY | FUND NAME | ROI |
|---|---|---|
| PSEi | 4.68% | |
| Philequity | Philequity PSE Index Fund Inc. | 5.34% |
| ALFM | Philippine Stock Index Fund Corp. | 5.27% |
| Sun Life | Sun Life Prosperity Philippine Stock Index Fund, Inc. | 4.87% |
| Philam | PAMI Equity Index Fund, Inc. | 4.20% |
| FAMI | First Metro Save and Learn Philippine Index Fund, Inc. | 2.56% |
How can you invest in index fund through a mutual fund company?
- Consider two things when picking the fund: fees and convenience. Check the table above and pick the one with the least fee. Another factor is to select the company with convenience in mind. It should be one that’s near your place of work or residence, has great customer customer service, etc.
- Prepare the following: minimum starting capital of ₱1,000, at least one (1) valid ID, and tax identification number.
- Visit the company website or drop by their office. Refer to the contact details of mutual fund companies.
- Fill out the forms.
- Wait for the confirmation through email, SMS, or mail.
Index funds through UITF
Next in the list are the unit investment trust funds (UITF). They are offered by UITF bank trust and trust companies. The data below shows the index funds according to UITF Philippines. However, I can only find the 1-yr return on investment (ROI). To help you make a decision, here is an article on the benefits of UITF.
Below is the performance of the index funds through UITF in 2019.
| BANK | FUND NAME | ROI |
|---|---|---|
| EastWest | EastWest PSEI Tracker Fund | 5.38% |
| BPI | BPI Philippine Equity Index Fund | 4.96% |
| Metrobank | Metro Philippine Equity Index Tracker Fund | 4.87% |
| Union Bank | UnionBank Philippine Equity Index Portfolio | 4.70% |
| PNB | PNB PHIL-INDEX TRACKER FUND | 4.67% |
| UCPB | UCPB Philippine Index Equity Fund | 4.65% |
| Security Bank | SB PHILIPPINE EQUITY INDEX FUND | 4.61% |
| BDO | BDO EQUITY INDEX FUND | 4.46% |
| CTBC | CTBC Bank – Sun Life Philippine Stock Index Feeder Fund | 4.09% |
| Atram | ATRAM Philippine Equity Smart Index Fund | 3.44% |
How can you invest in index fund through UITF?
- Compare fees and choose the fund with the least charges.
- Decide on a bank or trust entity. You can check this link for all companies that offer UITF products.
- Prepare at least initial capital of ₱1,000, one (1) valid ID, and TIN.
- Drop by the bank or trust company. You may also check their website to see if they have online registration.
- Fill out the forms and pay the capital.
- Look forward to notification via text or email or mail.
Index fund (PERA account)
Personal Equity and Retirement Account or PERA is our country’s version of the 401 (k) in the United States. It is geared for helping people save up for retirement.
By saying that, it is not easy to withdraw the money. The only way to enjoy the investment is you’re 55 years old, die young, or too sick, whichever comes first. PERA accounts can be opened in any Bangko Sentral Pilipinas-licensed administrators. Currently, there are only three institutions that are granted so far: Landbank, Bank of the Philippine Islands, Banco de Oro-Unibank. In the country there is only one index fund under PERA, and that is the BDO Equity Index Fund.
Below is its 2019 performance compared to the stock index.
| BANK | FUND NAME | ROI |
|---|---|---|
| PSEi | 4.68% | |
| BDO | BDO PERA EQUITY INDEX FUND | 3.01% |
How to invest in PERA index fund?
- Check the fees. There are additional PERA fees such as administrator’s fee, custodianship fee (the company in charge of keeping asset), and investment manager fee (optional).
- Prepare the minimum required investment of ₱1,000, one (1) valid ID, and TIN.
- Visit any Banco de Orobranch located nationwide. You may also visit the branch where you have an existing account.
- Ask for PERA representative and fill out the forms.
First Metro Philippine Equity Exchange Traded Fund (FMETF)
The First Metro Philippine Equity Exchange Traded Fund (FMETF) is actually a fund but its stock is traded on the Philippine Stock Exchange. It’s a cross between a managed fund and a stock.
So when you invest, you don’t go to a company like you do with a mutual fund or UITF. Instead, you open a stock broker’s account that can let you buy and sell stocks on the exchange.
Each FMETF stock that you buy already contains all of the index. Not only that, it follows the composition as close as possible. Its goal is simply track its movement, and that’s why the returns that you see in the chart below move similarly through the years.
| COMPANY | FUND NAME | ROI |
|---|---|---|
| PSEi | 4.68% | |
| FAMI | First Metro Phil. Equity Exchange Traded Fund, Inc. | 5.61% |
How can you invest in FMETF?
- You need to have a stock brokers’ account such as BPI Trade, BDO Nomura, COL Financial, First Metro Securities, etc. Check PSE complete list of stock brokerage company.
- Check their website. Some may allow online registration.
- Make sure that you have the following: a valid ID and tax identification number.
- Prepare the minimum capital to start your account. This varies between companies. You’d be ask to either deposit to their bank account or submit at their office.
- Once you have your log-in credential to the trading platform, you can now start buying FMETF stocks.
- For a more complete instruction, please check article on how to buy Philippine stocks.
Additional FMETF fees
Aside from management fee, anytime that you invest in FMETF would incur stock acquisition fee (which on the fees table is indicated as “Fee”). That’s because an FMETF can only be purchased as a stock in the stock exchange. The total fee is 0.295%.
And when you redeem your investment, you would also be charged for stock redemption fees (which on the fees table is indicated as “Exit fee”). This charge is assessed regardless if you gained or lost.
| FEES | AMOUNT |
|---|---|
| Broker’s Commission | ₱20 or 0.25% |
| VAT | 12% of commission |
| PSE Transaction Fee | 0.005% |
| SCCP* Fee | 0.01% |
| (Sell) Tax** | 0.6% |
- *SCCP is Securities Clearing Corporation of The Philippines
- **When you sell, you will have the same fees plus the tax of 0.6%
Tracking error and index funds
Another important factor to consider when investing in index fund is tracking error. Remember that the goals of index funds are two-fold: acquire all blue chip top 30 Philippine corporations and acquire their stocks in a way that mimic the composition of the index.
This means that not only they are asked to buy 30 different company shares. Such shares must be bought in proportion with respect to the stock index.
One way to determine how well fund managers achieve this is through the tracking error. It measures the difference between the return of the index fund and the stock index. It is a way to know how close the fund is able to mirror the ROI of the stock index. All funds have tracking error because the net asset value per unit/share (NAVPS or NAVPU) is usually valued lower than the index because of the fees.
This means that the smaller it is, the better the fund is able to follow the index. When it’s higher, the higher risks that the fund manager is taking which may not be ideal.
| NAME | TYPE | TRACKING ERROR |
|---|---|---|
| EastWest PSEI Tracker Fund | UITF | 0.03% |
| FMETF | ETF | 0.04% |
| Philequity MSCI Philippine Index Fund, Inc. | MF | 0.06% |
| BPI Philippine Equity Index Fund | UITF | 0.16% |
| BDO EQUITY INDEX FUND | UITF | 0.54% |
| Metro Philippine Equity Index Tracker Fund | UITF | 0.910% |
| CTBC Bank – Sun Life Philippine Stock Index Feeder Fund | UITF | -0.10% |
| BDO PERA Equity Index Fund | PERA | 1.44% |
| Philequity PSE Index Fund Inc. | MF | 0.03% – 3.27% |
| Security Bank Equity Index Fund | UITF | 0.90% – 3.03% |
| UCPB Philippine Index Equity Fund | UITF | Not available |
| UnionBank Equity Index Fund | UITF | Not available |
| PNB Enhanced Phil-Index Reference Fund | UITF | Not available |
| Land Bank Equity Index Fund | UITF | Not available |
| Philippine Stock Index Fund Corp. | MF | Not available |
| Sun Life Prosperity Philippine Stock Index Fund, Inc. | MF | Not available |
| PAMI Equity Index Fund, Inc. | MF | Not available |
Issues about index funds in the Philippines
Now, one of the things that you may realize is that all of the funds offered in the Philippine market—regardless if they track the index or actively managed—are very costly. Take index funds for example. They only track 30 companies in the Philippines, but the management fee ranges between 0.50% to 1.50% per year.
Maybe part of the reason is that the PSE corporation has started charging a licensing fee starting 2019. The fee is at 3% of the assets under management (AUM) of all the funds.
However, compare that to index funds offered in American market. In the United States, you can actually purchase the Vanguard Total Market ETF (exchange traded fund) and the expense ratio or fee is only 0.03%. But here’s more. The Vanguard Total Market ETF tracks 3,606 American corporations.
Frequently asked questions
Are index funds safe?
All index funds are highly regulated by the government. The Bangko Sentral ng Pilipinas oversee UITFs and PERA account, Securities and Exchange Commission on mutual funds and exchange traded funds, and Insurance Commission on variable universal life (VUL).
Another way to answer this question is to compare with other investments. Because they are invested in stocks, there is a potential for capital loss and the returns are not guaranteed, unlike conservative securities such as long term negotiable certificate of deposit, retail treasury bonds, time deposit or savings account. But if you compare with stocks, they are considered to be less aggressive. Their underlying assets of blue chip companies have established growth history, reputation, considerable market share in respective industry, etc.
What is the advantage of owning direct stocks over index funds?
When you own stocks, you become part of the business. You get to enjoy dividends, voting right, and invitation to annual stockholders meeting. The caveat is that you would need to have the expertise to manage your portfolio as well as the capital to buy all of the index.
Index funds are cost-effective means of investing. They’re affordable and easy. The funds own the stocks, while you as an investor is part of the fund. Any dividends that the fund receive from companies are most likely reinvested to provide more value to investors. For a more in-depth discussion, read Where to invest: direct stocks or investment funds?
Among the index funds, which one should you choose?
It depends on you. All of them are structured similarly, so it really boils down to convenience, minimum initial capital, facility for regular auto-invest, fees, and other factors like customer service. But if you’d like to know which one offers the least fee and the most return in 30-year projection, I would have to say it is the FMETF stock. See the full discussion on the best index fund.