I’ve said before that I pray that more Filipinos become moderate investors, even if most of them are conservative now. A good way to become a moderate investor is by educating yourself on the different investment instruments, and distributing your investments across them.

One investment instrument that gets a lot of attention is “pooled funds”, in which you join a “pool” of other investors, and a fund manager handles the whole pool of money depending on the objectives of the fund. Mutual funds and UITFs fall under this category.

But there’s a relatively recent addition to this category: ETFs, or exchange traded funds. ETFs became available in the US in 1993, Europe in 1999, and the Philippines in 2013. While there are many types of ETFs available in more advanced markets, they haven’t made a big splash here yet. I’ve been getting a few questions about ETFs, so I’ve put together a basic guide here so you can learn more about them.

What are ETFs?

An exchange traded fund is an investment fund that’s traded like a stock. There are lots of kinds of ETFs; some of them track foreign stock market indices, specific sectors like energy or oil, or commodities.

But the most basic type of ETF simply tracks a benchmark index to match its performance. So if an equity index ETF is tracking the Philippine Stock Exchange index, its underlying securities would consist of stocks like Ayala Land, SM Investments Corporation, PLDT, BPI, and so on, much like an equity mutual fund or UITF.

In short, think of an ETF as a mutual fund that you can buy and sell on the stock market. And because ETFs are traded like common stocks, they don’t have a NAVpu or NAVps like UITFs or mutual funds; their share prices change throughout the day as the market trades.

Basically, you get the diversification of a mutual fund with the flexibility of stock trading combined in an ETF.

What are the pros and cons of ETFs?

Pros:

• Cheaper diversification. Buying into just one ETF gives you exposure to a whole group of equities, meaning you don’t have to buy each individual stock yourself. So for a small amount of money, you can have a diversified portfolio. Anybody who can buy the minimum board lot can therefore participate in the growth of the Philippine economy. And ETFs are transparent about their structure; you can just visit their site and see the underlying securities that make up the fund (and in what percentage).
• Can cost less than actively managed funds. Mutual funds charge management fees of around 2%. UITFs can have trust fees of 0.20% to 1.50% per year. With buying and selling stocks, your costs will be lower. This is because an ETF is passively managed, meaning you’re not paying a fund manager for his services; you’re just paying brokerage fees.
  • Here’s an example to make things clearer. If you invest Php 50,000 in a UITF, you’d pay up to P750 (1.50%) in fees. (There may also be fees for early redemption.) Compare that to the total trading costs of buying Php 50,000 worth of an ETF on the PSE, which is P147, and P397.50 when selling. These small differences add up to a lot, so ETFs can be cheaper cost-wise in the long run.

Cons:

• Can’t beat the market. Because an ETF is designed to track an index, its aim is not to beat it, but just to match it. So if you were looking for investments to beat the PSE, you’d be better off with actively managed funds that seek to beat the index. You’re well diversified when you buy into an ETF, but remember: diversification limits your losses, but it also limits your gains.
• Can cost more than other pooled funds. If you like to invest small amounts regularly, like Php 10,000 each month, you’ll get charged for every transaction when you buy into an ETF. If small, regular investment is your strategy, you may be better off with a mutual fund or UITF that doesn’t charge you transaction fees each time, which can reduce your returns.

What options are available to the Filipino wanting to invest in ETFs?

Unfortunately, you don’t have a lot of choice in the Philippine market yet. So far, the only ETF here is the First Metro First Metro Philippine Equity Exchange-Traded Fund (First Metro ETF), an equity index ETF which started in December 2013. Other banks such as BPI and BDO have expressed an interest in launching their own ETFs, but they are still considering tax rules and regulations, as well as market appetites, before they do so.

Are ETFs for you?

The answer really depends on your investment goals and risk tolerance. If you can’t tolerate volatility with your money, equity-based ETFs may not be for you. But if you have an eye on the long-term and can take the risk, consider including ETFs in your investment plan. ETFs are still pretty new to the Philippines, so keep an eye out for more ETF options in the future.

I hope this guide has given you the basics about this new asset class that you can add to your portfolio. But before you jump in, remember this quotation from Warren Buffett: “Never test the depth of river with both feet.” Educate yourself on the risks, and you’ll make the best decisions with your investments.

Always remember to invest according to your investment objectives, time frame, risk tolerance and don’t forget to diversify properly.

In this 5th installment of the Outlook series, a discussion on the government’s role in the economy is discussed. While there has been admirable growth in the Philippine economy, one can wonder if the growth is because of or despite of the government. We are presenting the views of one of the country’s most distinguished and revered investment expert, Mr. Gus Cosio. With his many decades of experience in the finance industry both here and abroad, Gus Cosio has become an icon in the investing industry. He is currently the CEO of First Metro.

The 2015 Outlook of Gus Cosio

Our economy could have done much better in 2014 had the government put significant effort in improving the country’s infrastructure.  The country’s private sector has been doing most of the heavy lifting in terms of contributing to growth.  Businesses are hiring more people such that annual employment increase looks to be sustainable so far at the one million level, this in spite of little help from government both national and local.  Red tape continues to stifle businesses who would like to expand rapidly while lack of long-term government planning imposes more difficult challenges for enterprises to streamline operating costs.

A glaring example of the combined ineptitude of government units was the fiasco at the Port of Manila which wreaked havoc not only to traffic in the metropolis but also dragged down the operations of importers and exporters alike through a major disruption of the national supply chain.  Of course, the MRT/LRT situation is another example of government inaction which creates frustration to both users and non-users of the system.  In spite of it all, the government made some points in its favor.  I particularly like the Conditional Cash Transfer program which to my mind gives tremendous hope to the poorest of the poor.  I also observed good quality highways having been built in Mindanao and other rural areas.  The DepEd had also embarked on a massive classroom building program which delivered good quality school facilities to many places in the country.  I hope the responsible agencies continue to be productive in their programs.

Nevertheless, the Filipino has proven himself in terms of resilience, and Philippine business likewise, in the face of all these hurdles.  This gives me confidence that the national economy can do better in 2015.  There may be a slowdown in the real estate market due to the new regulations imposed by the BSP which lowers the loan to value of mortgages.  So while a housing backlog continues in the country, with financing becoming more difficult in 2015 compared to 2014, property companies will need to be more creative in their marketing and affordability schemes.  Banks will also feel the brunt since they would have to limit exposures to property resulting to slower loan production in this sector.

The bright spot is industry and manufacturing.  News of new manufacturing facilities being set up in the country has been plentiful.  In fact, most of the industrial estates that were set up in the late 1990’s are only seeing their capacities running full last year.  This means that new industrial estates need to be developed in the coming years.  Consumer spending will likely be robust.  Growth in this sector had been sustained in 2014 and given that 2015 is a year prior to national elections, we can expect consumer spending to even be greater.  I will not be surprised if I see our malls bursting with shoppers and restaurants filled to the brim.  The lower petroleum prices should leave more cash in the pockets of consumer as the pay less in running their cars and motorcycles.

I remain positive in my outlook for the Filipino consumer and investor in general.  The looming power shortage in the dry season this year is bringing attention to the longer term power supply situation in the country.  This is good because the need for additional generating capacity is being recognized.  Investment opportunities in the sector has also become available to the individual investor as a number of power producers are listed in the stock exchange.  Since employment is growing among the middle class, surely the various listed consumer companies should present good investment opportunities as well.  I am sure a lot of positive economic and business news will crop up in the country this year.  Given the credit rating upgrade last December, more investors – both financial and direct investors – will be giving the country a second look.  With more people getting involved in our country, economic activity can only grow.  I only hope that the government does not become a dampener.

Augusto M. Cosio, “Gus” as he is more popularly known, is a known advocate for the development of the Philippine capital markets. Having gained a wealth of experience in the global capital markets after working in Hong Kong and Singapore for global investment banks such as Deutsche Bank and BNP-Paribas, he is a passionate crusader for investment literacy among Filipinos. He is a regular resource speaker for the Philippine Stock Exchange Certified Securities Specialist Program and for capital market topics at the University of Asia and the Pacific. In the First Metro Group, Gus had spearheaded The Capital Market Seminar Series conducted regularly by First Metro Securities Brokers and First Metro Asset Management Inc. (FAMI) in their offices Makati, Binondo, Cebu and Davao.
He is the president of FAMI – the First Metro Asset Management Inc. – a multi awarded fund Management Company with 14 billion pesos of Assets under Management (AUM).