How to Easily Invest in Index Funds in the Philippines (2021)

Do you want to invest in index funds in the Philippines? Here’s an easy complete investing guide for you!

Warren Buffet, the most successful stock investor, has always recommended to invest in stock index. But what is a stock index? And why do the world’s wealthiest man suggest that everyday people like you and me invest in it?

This article is going to cover 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

But before we talk about the stock index, let’s first talk about Philippine Stock Exchange or PSE.

PSE is the country’s marketplace for stocks. It is where retail and institutional investors can invest in the stock market by trading shares of big corporations and conglomerates.

When stocks are acquired, the buyer becomes a shareholder who can get to participate in their growth story as well as in their moments of slowdown. This is reflected on the prices of the stock.

Buying the entire stock market or an entire industry

What if you decide to buy the entire stock market? Or the entire consumer industry like malls, groceries, etc?

Well, you can buy one stock in each company stocks that is listed on the Philippine Stocks Exchange.

Is that possible? It is.

However, it’s going to cost you a lot. Like, really a lot. That’s because most of the time, you’re not allowed to buy just one stock from each company. There’s a minimum number that you need to purchase called board lot.

Philippine Stock Exchange index

That’s why the stock index or equity index was conceptualized. It is a fixed basket of companies that are said to represent the entire stock market.

So when the worth of an entire index increases or decreases in value, it is believed that the whole market moves similarly.

You would hear the index mentioned in the news regularly. It’s because it is used as a means to understand where the market is at and how well it is performing. So if it is increasing in value, experts can point out that the market is doing well.

If it is not and instead its value is decreasing, then experts might say that a sell-off is occurring or worse a recession if it’s been going on for quite some time.

In short, it is used as a benchmark on how well stock investments are doing. Buffet usually measures his success by checking if his returns beat the index.

Investmentfunds, traders, and investors in general similarly compare the returns of their portfolio to the index.

In the country, the list is called the Philippine Stock Exchange indexor PSEi, which can be called either just the stock index or index. It is also called PSE Composite Index or Phisix.

It is composed of the top 30 companies that are carefully selected on the basis of their being representative of the entire market.

The table below shows our local stock index as of September 2020. These companies are selected according to the following criteria:

  • Ranking is based on full market cap.
  • Free float of the company must be at least 12%.
  • The company must be in the top quartile (top 25%) in median daily value in 9 months out of 12-month period in review.
COMPANY TICKER CATEGORY
Aboitiz Equity Ventures, Inc. AEV Holdings
Aboitiz Power Corp. AP Power
Alliance Global Group, Inc. AGI Holdings
Ayala Corporation AC Holdings
Ayala Land, Inc. ALI Real estate
Bank of the Philippine Islands BPI Bank
BDO Unibank, Inc. BDO Bank
Bloomberry Resorts Corporation BLOOM Holdings
DMCI Holdings, Inc. DMC Real estate
Emperador Inc. EMP Food and Beverage
First Gen Corporation FGEN Power
Globe Telecom, Inc. GLO Telecommunications
GT Capital Holdings, Inc. GTCAP Holdings
International Container Terminal Services, Inc. ICT Logistics
JG Summit Holdings, Inc. JGS Holdings
Jollibee Foods Corporation JFC Food and Beverage
LT Group, Inc. LTG Holdings
Manila Electric Company MER Power
Megaworld Corporation MEG Real estate
Metro Pacific Investments Corporation MPI Holdings
Metropolitan Bank & Trust Company MBT Bank
PLDT Inc. TEL Telecommunications
Puregold Price Club, Inc. PGOLD Commerce
Robinsons Land Corporation RLC Real estate
Robinsons Retail Holdings, Inc. RRHI Holdings
San Miguel Corporation SMC Food and Beverage
Security Bank Corporation SECB Bank
SM Investments Corporation SM Holdings
SM Prime Holdings, Inc. SMPH Real estate
Universal Robina Corporation URC Food and Beverage

The stocks of these companies are also called blue chips. That’s because they demonstrated historical growth story and liquidity, meaning that they are bought or sold very frequently in the market.

Some companies were taken off of the list over the past years, and others would then be added in their place. Additionally, the positions may change depending on the valuation of the businesses.

Other indices (plural of index) also exist such as those tracking the value of entire industries or assets like bonds. More of this in the later section.

  • PSE All Shares Index (ALL)
  • PSE Financials Index (FIN)
  • PSE Holding Firms Index (HDG)
  • PSE Industrial Index (IND)
  • PSE Mining and Oil Index (M-O)
  • PSE Property Index (PRO)
  • PSE Services Index (SVC)
  • PSE SME Sector (SME)

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.

PSEi Total Return: How much can you earn when investing in the stock index?

You may look back as far as post-EDSA stock market on the cumulative price returns. Before 2019, the exchange only tracked the price returns of the constituent shares. Starting that year, the PSEi Total Return was introduced.

The PSEi Total Return is a much more accurate yardstick on gains. It takes into account cumulative returns on the prices and all dividends that are issued by these blue chip stocks.

According to news reports, the PSEi Total Return was calculated since 2007. Unfortunately, there are no free references that can be found online that published such historical data.

Hence to understand the table below, here are a few details:

  • End of Year is simply the change for a year, which is obtained by dividing the difference between previous and current year values, except starting 2019.
  • Since 2019, the PSE began using Total Return which is reflected below.
  • CAGR or compounded annual growth rate is the yearly growth since 2010.
  • Due to the introduction of PSEi Total Return and the absence of free resources on its historical computed values, this is a less accurate depiction of the past price movement. The table will be updated as soon as data is made available free of charge by the Philippine Stocks Exchange.
YEAR END OF YEAR % CAGR
2010 37.62% 37.62%
2011 4.07% 19.67%
2012 32.95% 23.95%
2013 1.33% 17.86%
2014 22.76% 18.82%
2015 -3.85% 14.70%
2016 -1.60% 12.22%
2017 25.11% 13.75%
2018 -12.76% 10.45%
2019 4.68% 9.86%
2020 -8.60% 8.04%

As you can see, there are years when the return is negative. Overall, since 2010 you’d expect your money to grow on average 8.04% each year. Here’s how it looks like if we imagine that you invested P1 million in 2010.

YEAR CAPITAL GAIN/LOSS BALANCE
2010 1,000,000 376,214 1,376,214
2011 55,957 1,432,171
2012 471,969 1,904,140
2013 25,256 1,929,396
2014 439,201 2,368,597
2015 -91,228 2,277,369
2016 -36,506 2,240,864
2017 562,712 2,803,576
2018 -357,849 2,445,726
2019 114,460 2,560,186
2020 -220,176 2,340,010

So a million pesos in 2010 would be worth 2.34 million in 2020. As an analogy, that’s like making a deposit to a bank account that earns an interest of 8.04% every year.

And here’s another table for a yearly investment of P100k.

YEAR CAPITAL GAIN/LOSS BALANCE
2010 100,000 37,621 137,621
2011 200,000 9,662 247,283
2012 300,000 114,446 461,730
2013 400,000 7,451 569,180
2014 500,000 152,330 821,510
2015 600,000 -35,493 886,018
2016 700,000 -15,806 970,212
2017 800,000 268,745 1,338,957
2018 900,000 -183,669 1,255,288
2019 1,000,000 63,427 1,418,716
2020 1,100,000 -130,610 1,388,106

The equity index funds

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.

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.

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.

Types of equity index funds in the Philippines

In the Philippines, these are the available companies that offer index funds.

  1. Mutual funds
  2. Unit investment trust funds (UITF)
  3. PERA account
  4. First Metro Philippine Equity Exchange Traded Fund (FMETF)
  5. Variable universal life (VUL) plan
  6. Feeder funds

See below the equity index funds that mirror the Philippine Stocks Exchange Index (PSEi) arranged alphabetically.

NAME TYPE
BDO EQUITY INDEX FUND UITF
BDO PERA EQUITY INDEX FUND UITF
BDO PERA Equity Index Fund PERA
BPI Philippine Equity Index Fund UITF
CTBC Bank – Sun Life Philippine Stock Index Feeder Fund UITF
EastWest PSEI Tracker Fund UITF
First Metro Philippine Equity Exchange-Traded Fund ETF
Land Bank Equity Index Fund UITF
Metro Philippine Equity Index Tracker Fund UITF
PAMI Equity Index Fund, Inc. Mutual fund
Philequity MSCI Philippine Index Fund, Inc. Mutual fund
Philequity PSE Index Fund Inc. Mutual fund
Philippine Stock Index Fund Corp. Mutual fund
PNB Enhanced Phil-Index Reference Fund UITF
PRUInvest PH Equity Index Tracker Fund (Class A) UITF
PRUInvest PH Equity Index Tracker Fund (Class I) UITF
Security Bank Equity Index Fund UITF
Sun Life Prosperity Philippine Stock Index Fund, Inc. Mutual fund
UCPB Philippine Index Equity Fund UITF
UnionBank Equity Index Fund UITF

Other indices and index funds available to Filipino investors

So far, the discussion has been very focused on the funds that invest in blue chip stocks and are depicting the returns of the PSEi. There are other indices that exist, and so are the funds that track them.

For instance, you might see in the tables in this article the Philequity MSCI Philippine Index Fund, Inc., which has 23 constituent companies and reflects the returns of the Philippine index created by Morgan Stanley Capital Investment, which is said to cover 85% of the country’s equity market.

Also, CTBC offers a feeder fund that targets Sun Life Philippine Stock Index.

Some of them are in US dollars. Under the benchmark column, you’d see the sort of index whose returns they’re trying to reflect. Also under the target fund column on feeder funds, you’d see the specific fund that they’re invested in.

FUND NAME COMPANY CURRENCY BENCHMARK TARGET FUND
BDO DEVELOPED MARKETS PROPERTY INDEX FEEDER FUND BDO Dollar FTSE EPRA/NAREIT Developed Markets Index iShares Developed Markets Property Yield UCITS ETF
BDO GLOBAL EM EQUITY INDEX FEEDER FUND BDO Dollar MSCI Emerging Markets Index BlackRock Global Index Funds (BGIF) iShares Emerging Markets Equity Index Fund (D2 USD Share Class ISIN LU1811364212)
BDO GLOBAL EQUITY INDEX FEEDER FUND BDO Dollar MSCI World Index BlackRock Global Index Funds (BGIF) iShares World Equity Index Fund (D2 USD Share Class with ISIN LU1811364055)
BDO JAPAN EQUITY INDEX FEEDER FUND BDO Yen JPX-Nikkei Index 400 JPX-Nikkei Index 400 Exchange Traded Fund
BPI Invest US Equity Index Feeder Fund Class P (PHP Class) BPI Peso S&P® 500 index SPDR S&P 500 ETF Trust
BPI Philippine Consumer Equity Index Fund BPI Peso BPI Philippine
Consumer Equity Index
BPI Philippine Infrastructure Equity Index Fund BPI Peso BPI Philippine Infrastructure Equity Index
BPI US Equity Index Feeder Fund BPI Dollar S&P® 500 index SPDR S&P 500 ETF Trust
CTBC Bank-Sun Life Philippine
Stock Index Feeder Fund
CTBC Peso PSEi Sun Life Philippine
Stock Index Fund
EastWest S&P 500 Index Equity Feeder Fund East West Dollar S&P® 500 index iShares Core S&P 500 ETF
Philequity MSCI Philippine Index Fund, Inc. Philequity Pesos MSCI Philippines Index (MXPH)
SB GLOBAL EQUITY INDEX FEEDER FUND (Class A) Security Bank Dollar FTSE Global All Cap Index Vanguard Total World Stock ETF. Target market is retail investors
SB GLOBAL EQUITY INDEX FEEDER FUND (Class B) Security Bank Dollar FTSE Global All Cap Index Vanguard Total World Stock ETF. Target market is institutional investors.
SB GLOBAL EQUITY INDEX FEEDER FUND (Class F) Security Bank Dollar FTSE Global All Cap Index Vanguard Total World Stock ETF. Target market is high-net worth individuals.
SB US EQUITY INDEX FEEDER FUND (Class A) Security Bank Dollar CRSP US Total Market Index Vanguard Total Stock Market ETF. Target market is retail investors.
SB US EQUITY INDEX FEEDER FUND (Class B) Security Bank Dollar CRSP US Total Market Index Vanguard Total Stock Market ETF. Target market is insitutional investors.
SB US EQUITY INDEX FEEDER FUND (Class F) Security Bank Dollar CRSP US Total Market Index Vanguard Total Stock Market ETF. Target market is high-net worth individuals.
Sun Life Prosperity World Equity Index Feeder Fund, Inc. Sunlife Peso 95% MSCI ACWI (PHP Terms) + 5%
30-day USD Dep Rate
SPDR MSCI All Country World Index UCITS Exchange Traded Fund

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. 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.

Disadvantages of index funds

And below are some of the downsides in investing in index funds.

  • Returns are not guaranteed.
  • No control on what stocks are part of the fund.
  • Your return on investment (ROI) will only reflect the market average. That means your return is the average of all stocks in the index, whether they are gaining or losing.
  • When the market falls, the funds follow suit. And there is no way to protect one from the slowdown unless you pull out of it.
  • They don’t give out dividends, so you only gain when their net asset value increase.
  • The Philippine index funds have very expensive fees compared to index funds (that are tracking foreign markets, admittedly of course) being offered in other countries, as discussed in later section.

Top performing index funds in the Philippines in 2020

These are the top 10 index funds. This list combines both domestic and foreign indexes. The PSEi ended 2020 down by 8.60%. Data is updated as of December 29, 2020.

FUND NAME CURRENCY TYPE 1 YEAR RETURN
Sun Life Prosperity World Equity Index Feeder Fund, Inc. Peso Mutual fund n.a.
SB US EQUITY INDEX FEEDER FUND (Class F) Dollar UITF 17.78%
SB US EQUITY INDEX FEEDER FUND (Class B) Dollar UITF 17.78%
SB US EQUITY INDEX FEEDER FUND (Class A) Dollar UITF 17.55%
BPI US Equity Index Feeder Fund Dollar UITF 15.42%
BDO GLOBAL EQUITY INDEX FEEDER FUND Dollar UITF 14.90%
BDO GLOBAL EM EQUITY INDEX FEEDER FUND Dollar UITF 13.22%
SB GLOBAL EQUITY INDEX FEEDER FUND (Class F) Dollar UITF 12.80%
SB GLOBAL EQUITY INDEX FEEDER FUND (Class A) Dollar UITF 12.58%
BPI Invest US Equity Index Feeder Fund Class P (PHP Class) Peso UITF 9.54%
BDO JAPAN EQUITY INDEX FEEDER FUND Yen UITF 5.83%
BPI Philippine Infrastructure Equity Index Fund Peso UITF 3.44%
BDO DEVELOPED MARKETS PROPERTY INDEX FEEDER FUND Dollar UITF 0.00%
EastWest S&P 500 Index Equity Feeder Fund Dollar UITF 0.00%
PRUInvest PH Equity Index Tracker Fund (Class A) Peso UITF 0.00%
PRUInvest PH Equity Index Tracker Fund (Class I) Peso UITF 0.00%
SB GLOBAL EQUITY INDEX FEEDER FUND (Class B) Dollar UITF 0.00%
LANDBANK Equity Fund Peso UITF -4.47%
ATRAM Philippine Equity Smart Index Fund Peso UITF -6.25%
UCPB Philippine Index Equity Fund Peso UITF -6.88%
BPI Philippine Consumer Equity Index Fund Peso UITF -7.06%
Metro Philippine Equity Index Tracker Fund Peso UITF -7.75%
UnionBank PSE Index Tracker Fund Peso UITF -7.95%
PNB PHIL-INDEX TRACKER FUND(formerly PNB ENHANCED PHIL-INDEX REFERENCE FUND) Peso UITF -7.97%
BPI Philippine Equity Index Fund Peso UITF -8.18%
EastWest PSEI Tracker Fund Peso UITF -8.30%
BDO PERA EQUITY INDEX FUND Peso UITF -8.42%
BDO EQUITY INDEX FUND Peso UITF -8.47%
First Metro Phil. Equity Exchange Traded Fund, Inc. Peso ETF -8.56%
Philippine Stock Index Fund Corp. Peso Mutual fund -8.61%
Philequity PSE Index Fund Inc. Peso Mutual fund -8.81%
Sun Life Prosperity Philippine Stock Index Fund, Inc. Peso Mutual fund -8.84%
SB PHILIPPINE EQUITY INDEX FUND Peso UITF -8.86%
CTBC Bank – Sun Life Philippine Stock Index Feeder Fund Peso UITF -9.05%
PAMI Equity Index Fund, Inc. Peso Mutual fund -9.21%
Philequity MSCI Philippine Index Fund, Inc. Peso Mutual fund -10.96%
First Metro Save and Learn Philippine Index Fund, Inc. Peso Mutual fund -11.39%

How to start investing in index funds?

So how can you invest in index funds that are available in the Philippines? VULs are excluded 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.

Therefore, what you’re about to learn are in succeeding sections are the following:

  • fees, charges, and taxes
  • tracking error
  • investing through mutual fund
  • investing through UITF
  • investing through PERA
  • investing through ETF

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.

The funds are arranged from lowest to highest management fee or trust fee.

 

NAME TYPE STARTING CAPITAL TRUST FEE HOLDING PERIOD EXIT FEE SALES LOAD
FMETF ETF 1,000 0.50% 0.895% 0.295%
EastWest PSEI Tracker Fund UITF 10,000 0.75% 30 calendar P500.00 or 0.25% of redemption proceeds, whichever is higher
UCPB Philippine Index Equity Fund UITF 1,000 0.75% 30 calendar days 5%
PRUInvest PH Equity Index Tracker Fund (Class I) UITF 10,000 1.00% 30 banking days 0.50% based on redemption amount
BDO EQUITY INDEX FUND UITF 10,000 1.00% 30 calendar 0.50% of the Original Participation Amount
BDO PERA EQUITY INDEX FUND UITF 1,000 1.00% 30 calendar 1.00% of the Original Participation Amount
BDO PERA Equity Index Fund PERA 1,000 1.00% 30 calendar days 1%
BPI Philippine Equity Index Fund UITF 10,000 1.00% 0 calendar None
CTBC Bank – Sun Life Philippine Stock Index Feeder Fund UITF 10,000 1.00% 30 calendar 1.00%
Metro Philippine Equity Index Tracker Fund UITF 25,000 1.00% 7 calendars 50% of income earned
Philequity MSCI Philippine Index Fund, Inc. Mutual fund 1,000 1.00% 90 days 1% 5.00%
Philequity PSE Index Fund Inc. Mutual fund 1,000 1.00% 1yr 2% up to 5%
Philippine Stock Index Fund Corp. Mutual fund 5,000 1.00% 3months 1% 1.50%
PNB Enhanced Phil-Index Reference Fund UITF 10,000 1.00% 30 calendar days 50% of income earned
PRUInvest PH Equity Index Tracker Fund (Class A) UITF 10,000 1.00% 30 banking days 0.50% based on redemption amount
Security Bank Equity Index Fund UITF 10,000 1.00% None None
Sun Life Prosperity Philippine Stock Index Fund, Inc. Mutual fund 1,000 1.00% 6months 1% 2.00%
UnionBank Equity Index Fund UITF 50,000 1.00% 30 calendar days 0.25% or 500, which is higher
PAMI Equity Index Fund, Inc. Mutual fund 1,000 1.12% 6months 1% 3.36%
Land Bank Equity Index Fund UITF 5,000 1.50% 30 calendar days 25% of income earned, and not less than P500

 

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
PRUInvest PH Equity Index Tracker Fund (Class A, I) UITF 0.01%
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

1. How can you invest in index fund through a mutual fund company?

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.

  1. 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.
  2. Prepare the following: minimum starting capital of ₱1,000, at least one (1) valid ID, and tax identification number.
  3. Visit the company website or drop by their office. Refer to the contact details of mutual fund companies.
  4. Fill out the forms.
  5. Wait for the confirmation through email, SMS, or mail.

2. How can you invest in index fund through UITF?

Next in the list are the unit investment trust funds (UITF). They are offered by UITF bank trust and trust companies.

To help you make a decision, here is an article on the benefits of UITF.

  1. Compare fees and choose the fund with the least charges.
  2. Decide on a bank or trust entity. You can check this link for all companies that offer UITF products.
  3. Prepare at least initial capital of ₱1,000, one (1) valid ID, and TIN.
  4. Drop by the bank or trust company. You may also check their website to see if they have online registration.
  5. Fill out the forms and pay the capital.
  6. Look forward to notification via text or email or mail.

3. How to invest in PERA index fund?

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.

  1. 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).
  2. Prepare the minimum required investment of ₱1,000, one (1) valid ID, and TIN.
  3. Visit any Banco de Oro branch located nationwide. You may also visit the branch where you have an existing account.
  4. Ask for PERA representative and fill out the forms.

4. How can you invest index fund through 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 via stock broker 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.

fmetf psei
FMETF and PSEi returns since 2014
  1. You need to have a stock brokers’ account. Check this PSE complete list of stock brokerage company. Or you may invest in one of the best online stock brokers.
  2. Check their website. Some may allow online registration.
  3. Make sure that you have the following: a valid ID and tax identification number.
  4. 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.
  5. Once you have your log-in credential to the trading platform, you can now start buying FMETF stocks.
  6. For a more complete instruction, please check article on how to buy Philippine stocks.

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.

Philippine PSE stock market fees charges
  • *SCCP is Securities Clearing Corporation of The Philippines
  • **When you sell, you will have the same fees plus the tax of 0.6%

What is the best equity index fund?

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.

However, if you really want to get the most out of your investment, no question about it—you must go for one with the least fees. The more you can lower the costs, the better ROI (return on investment) that you get especially when talking in the long term.

Issues about index funds in the Philippines

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 is between 0.50% to 1.50% per year. And by comparison with other local funds, that is already considered in the low end of the range.

However, compare that to similar funds offered elsewhere in the world. 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 the clincher. The Vanguard Total Market ETF tracks 3,606 American corporations, way more than the local equity index funds.

A small part that makes up the fee is the licensing fee collected by PSE in 2019. The fee is 0.03% of the assets under management (AUM) per annum, and by all indications this is passed on to investors.

About 15 funds are directly affected by the change, and they have no other recourse because they’re tracking PSEi and PSE is the only entity that publishes the composite index. Fund managers are said to have opposed the move and offered to pay a fixed fee instead.

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 the stocks.

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.

Do index funds give dividends?

In the past, FMETF gave stock dividends. Today, no index funds in the market are giving out cash dividends. Thus, it is understood that whatever dividends they receive from component stocks are reinvested back to the funds.

References

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