Index funds are low-cost, efficient way in investing in the stock index. But what is an index fund? Read on and find out more. 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

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?

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. Investment funds, 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 index or 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.
COMPANYTICKERCATEGORY
Aboitiz Equity Ventures, Inc.AEVHoldings
Aboitiz Power Corp.APPower
Alliance Global Group, Inc.AGIHoldings
Ayala CorporationACHoldings
Ayala Land, Inc.ALIReal estate
Bank of the Philippine IslandsBPIBank
BDO Unibank, Inc.BDOBank
Bloomberry Resorts CorporationBLOOMHoldings
DMCI Holdings, Inc.DMCReal estate
Emperador Inc.EMPFood and Beverage
First Gen CorporationFGENPower
Globe Telecom, Inc.GLOTelecommunications
GT Capital Holdings, Inc.GTCAPHoldings
International Container Terminal Services, Inc.ICTLogistics
JG Summit Holdings, Inc.JGSHoldings
Jollibee Foods CorporationJFCFood and Beverage
LT Group, Inc.LTGHoldings
Manila Electric CompanyMERPower
Megaworld CorporationMEGReal estate
Metro Pacific Investments CorporationMPIHoldings
Metropolitan Bank & Trust CompanyMBTBank
PLDT Inc.TELTelecommunications
Puregold Price Club, Inc.PGOLDCommerce
Robinsons Land CorporationRLCReal estate
Robinsons Retail Holdings, Inc.RRHIHoldings
San Miguel CorporationSMCFood and Beverage
Security Bank CorporationSECBBank
SM Investments CorporationSMHoldings
SM Prime Holdings, Inc.SMPHReal estate
Universal Robina CorporationURCFood 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.
YearEnd of Year %CAGR
201037.62%37.62%
20114.07%19.67%
201232.95%23.95%
20131.33%17.86%
201422.76%18.82%
2015-3.85%14.70%
2016-1.60%12.22%
201725.11%13.75%
2018-12.76%10.45%
20194.68%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.

YearCapitalGain/LossBalance
20101,000,000376,2141,376,214
201155,9571,432,171
2012471,9691,904,140
201325,2561,929,396
2014439,2012,368,597
2015-91,2282,277,369
2016-36,5062,240,864
2017562,7122,803,576
2018-357,8492,445,726
2019114,4602,560,186
2020-220,1762,340,010

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.

YearCapitalGain/LossBalance
2010100,00037,621137,621
2011200,0009,662247,283
2012300,000114,446461,730
2013400,0007,451569,180
2014500,000152,330821,510
2015600,000-35,493886,018
2016700,000-15,806970,212
2017800,000268,7451,338,957
2018900,000-183,6691,255,288
20191,000,00063,4271,418,716
20201,100,000-130,6101,388,106

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.

NameType
BDO EQUITY INDEX FUNDUITF
BDO PERA EQUITY INDEX FUNDUITF
BDO PERA Equity Index Fund PERA
BPI Philippine Equity Index FundUITF
CTBC Bank – Sun Life Philippine Stock Index Feeder FundUITF
EastWest PSEI Tracker FundUITF
First Metro Philippine Equity Exchange-Traded FundETF
Land Bank Equity Index FundUITF
Metro Philippine Equity Index Tracker FundUITF
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 FundUITF
Sun Life Prosperity Philippine Stock Index Fund, Inc.Mutual fund
UCPB Philippine Index Equity FundUITF
UnionBank Equity Index FundUITF

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.

And if you are interested, you may also see the article on major Asian equity indexes.

Fund nameCompanyCurrencyBenchmarkTarget fund
BDO DEVELOPED MARKETS PROPERTY INDEX FEEDER FUNDBDODollarFTSE EPRA/NAREIT Developed Markets IndexiShares Developed Markets Property Yield UCITS ETF
BDO GLOBAL EM EQUITY INDEX FEEDER FUNDBDODollarMSCI Emerging Markets IndexBlackRock Global Index Funds (BGIF) iShares Emerging Markets Equity Index Fund (D2 USD Share Class ISIN LU1811364212)
BDO GLOBAL EQUITY INDEX FEEDER FUNDBDODollarMSCI World IndexBlackRock Global Index Funds (BGIF) iShares World Equity Index Fund (D2 USD Share Class with ISIN LU1811364055)
BDO JAPAN EQUITY INDEX FEEDER FUNDBDOYenJPX-Nikkei Index 400JPX-Nikkei Index 400 Exchange Traded Fund
BPI Invest US Equity Index Feeder Fund Class P (PHP Class)BPIPesoS&P® 500 indexSPDR S&P 500 ETF Trust
BPI Philippine Consumer Equity Index FundBPIPesoBPI Philippine
Consumer Equity Index
BPI Philippine Infrastructure Equity Index FundBPIPesoBPI Philippine Infrastructure Equity Index
BPI US Equity Index Feeder FundBPIDollarS&P® 500 indexSPDR S&P 500 ETF Trust
CTBC Bank-Sun Life Philippine
Stock Index Feeder Fund
CTBCPesoPSEiSun Life Philippine
Stock Index Fund
EastWest S&P 500 Index Equity Feeder FundEast WestDollarS&P® 500 indexiShares Core S&P 500 ETF
Philequity MSCI Philippine Index Fund, Inc.PhilequityPesosMSCI Philippines Index (MXPH)
SB GLOBAL EQUITY INDEX FEEDER FUND (Class A)Security BankDollarFTSE Global All Cap IndexVanguard Total World Stock ETF. Target market is retail investors
SB GLOBAL EQUITY INDEX FEEDER FUND (Class B)Security BankDollarFTSE Global All Cap IndexVanguard Total World Stock ETF. Target market is institutional investors.
SB GLOBAL EQUITY INDEX FEEDER FUND (Class F)Security BankDollarFTSE Global All Cap IndexVanguard Total World Stock ETF. Target market is high-net worth individuals.
SB US EQUITY INDEX FEEDER FUND (Class A)Security BankDollarCRSP US Total Market IndexVanguard Total Stock Market ETF. Target market is retail investors.
SB US EQUITY INDEX FEEDER FUND (Class B)Security BankDollarCRSP US Total Market IndexVanguard Total Stock Market ETF. Target market is insitutional investors.
SB US EQUITY INDEX FEEDER FUND (Class F)Security BankDollarCRSP US Total Market IndexVanguard Total Stock Market ETF. Target market is high-net worth individuals.
Sun Life Prosperity World Equity Index Feeder Fund, Inc.SunlifePeso95% 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 nameCurrencyType1 year return
Sun Life Prosperity World Equity Index Feeder Fund, Inc.PesoMutual fundn.a. 
SB US EQUITY INDEX FEEDER FUND (Class F)DollarUITF17.78%
SB US EQUITY INDEX FEEDER FUND (Class B)DollarUITF17.78%
SB US EQUITY INDEX FEEDER FUND (Class A)DollarUITF17.55%
BPI US Equity Index Feeder FundDollarUITF15.42%
BDO GLOBAL EQUITY INDEX FEEDER FUNDDollarUITF14.90%
BDO GLOBAL EM EQUITY INDEX FEEDER FUNDDollarUITF13.22%
SB GLOBAL EQUITY INDEX FEEDER FUND (Class F)DollarUITF12.80%
SB GLOBAL EQUITY INDEX FEEDER FUND (Class A)DollarUITF12.58%
BPI Invest US Equity Index Feeder Fund Class P (PHP Class)PesoUITF9.54%
BDO JAPAN EQUITY INDEX FEEDER FUNDYenUITF5.83%
BPI Philippine Infrastructure Equity Index FundPesoUITF3.44%
BDO DEVELOPED MARKETS PROPERTY INDEX FEEDER FUNDDollarUITF0.00%
EastWest S&P 500 Index Equity Feeder FundDollarUITF0.00%
PRUInvest PH Equity Index Tracker Fund (Class A)PesoUITF0.00%
PRUInvest PH Equity Index Tracker Fund (Class I)PesoUITF0.00%
SB GLOBAL EQUITY INDEX FEEDER FUND (Class B)DollarUITF0.00%
LANDBANK Equity FundPesoUITF-4.47%
ATRAM Philippine Equity Smart Index FundPesoUITF-6.25%
UCPB Philippine Index Equity FundPesoUITF-6.88%
BPI Philippine Consumer Equity Index FundPesoUITF-7.06%
Metro Philippine Equity Index Tracker FundPesoUITF-7.75%
UnionBank PSE Index Tracker FundPesoUITF-7.95%
PNB PHIL-INDEX TRACKER FUND(formerly PNB ENHANCED PHIL-INDEX REFERENCE FUND)PesoUITF-7.97%
BPI Philippine Equity Index FundPesoUITF-8.18%
EastWest PSEI Tracker FundPesoUITF-8.30%
BDO PERA EQUITY INDEX FUNDPesoUITF-8.42%
BDO EQUITY INDEX FUNDPesoUITF-8.47%
First Metro Phil. Equity Exchange Traded Fund, Inc.PesoETF-8.56%
Philippine Stock Index Fund Corp.PesoMutual fund-8.61%
Philequity PSE Index Fund Inc.PesoMutual fund-8.81%
Sun Life Prosperity Philippine Stock Index Fund, Inc.PesoMutual fund-8.84%
SB PHILIPPINE EQUITY INDEX FUNDPesoUITF-8.86%
CTBC Bank – Sun Life Philippine Stock Index Feeder FundPesoUITF-9.05%
PAMI Equity Index Fund, Inc.PesoMutual fund-9.21%
Philequity MSCI Philippine Index Fund, Inc.PesoMutual fund-10.96%
First Metro Save and Learn Philippine Index Fund, Inc.PesoMutual 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.

NameTypeStarting capitalTrust feeHolding periodExit feeSales load
FMETFETF1,0000.50% 0.895%0.295%
EastWest PSEI Tracker FundUITF10,0000.75%30 calendarP500.00 or 0.25% of redemption proceeds, whichever is higher 
UCPB Philippine Index Equity FundUITF1,0000.75%30 calendar days5% 
PRUInvest PH Equity Index Tracker Fund (Class I)UITF10,0001.00%30 banking days0.50% based on redemption amount
BDO EQUITY INDEX FUNDUITF10,0001.00%30 calendar0.50% of the Original Participation Amount 
BDO PERA EQUITY INDEX FUNDUITF1,0001.00%30 calendar1.00% of the Original Participation Amount  
BDO PERA Equity Index Fund PERA1,0001.00%30 calendar days1% 
BPI Philippine Equity Index FundUITF10,0001.00%0 calendarNone 
CTBC Bank – Sun Life Philippine Stock Index Feeder FundUITF10,0001.00%30 calendar1.00% 
Metro Philippine Equity Index Tracker FundUITF25,0001.00%7 calendars50% of income earned 
Philequity MSCI Philippine Index Fund, Inc.Mutual fund1,0001.00%90 days1%5.00%
Philequity PSE Index Fund Inc.Mutual fund1,0001.00%1yr2%up to 5%
Philippine Stock Index Fund Corp.Mutual fund5,0001.00%3months1%1.50%
PNB Enhanced Phil-Index Reference Fund UITF10,0001.00%30 calendar days50% of income earned 
PRUInvest PH Equity Index Tracker Fund (Class A)UITF10,0001.00%30 banking days0.50% based on redemption amount 
Security Bank Equity Index FundUITF10,0001.00%NoneNone 
Sun Life Prosperity Philippine Stock Index Fund, Inc.Mutual fund1,0001.00%6months1%2.00%
UnionBank Equity Index FundUITF50,0001.00%30 calendar days0.25% or 500, which is higher 
PAMI Equity Index Fund, Inc.Mutual fund1,0001.12%6months1%3.36%
Land Bank Equity Index FundUITF5,0001.50%30 calendar days25% of income earned, and not less than P500 

You can read in separate discussion the fees and charges for index funds under feeder funds available in the country.

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.

NameTypeTracking error
PRUInvest PH Equity Index Tracker Fund (Class A, I)UITF0.01%
EastWest PSEI Tracker FundUITF0.03%
FMETFETF0.04%
Philequity MSCI Philippine Index Fund, Inc.MF0.06%
BPI Philippine Equity Index FundUITF0.16%
BDO EQUITY INDEX FUNDUITF0.54%
Metro Philippine Equity Index Tracker FundUITF0.910%
CTBC Bank – Sun Life Philippine Stock Index Feeder FundUITF-0.10%
BDO PERA Equity Index Fund PERA1.44%
Philequity PSE Index Fund Inc.MF0.03% – 3.27%
Security Bank Equity Index FundUITF0.90% – 3.03%
UCPB Philippine Index Equity FundUITFNot available
UnionBank Equity Index FundUITFNot available
PNB Enhanced Phil-Index Reference Fund UITFNot available
Land Bank Equity Index FundUITFNot available
Philippine Stock Index Fund Corp.MFNot available
Sun Life Prosperity Philippine Stock Index Fund, Inc.MFNot available
PAMI Equity Index Fund, Inc.MFNot 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.

srcset=https://pesolab.com/wp-content/uploads/2019/07/fmetf-psei.png
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.

srcset=https://pesolab.com/wp-content/uploads/2021/01/Philippine-PSE-stock-market-fees-charges-taxes.png
Fees and charges in trading stocks like FMETF.
  • *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. Here is an article that covers the topic on the best index fund in details.

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. For a more in-depth discussion, read Where to invest: direct stocks or investment funds?

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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