More and more Filipinos are now investing in the stock market with an 11.4% increase in 2013 from 2012. With roughly 600,000 Filipinos investing in stocks, the number still makes up less than 1% of the country’s population. That means there is still a lot of room for would-be investors and traders. If you want to dip your feet into the stock market without jumping in headfirst, consider exchange traded funds or ETFs.
What are ETFs?
An exchange traded fund (ETF) is an investment fund that holds assets, such as stocks and bonds. It is like a mutual fund or UITF where each fund contains different holdings. However, ETFs differ in the sense that ETFs are traded within the day like a regular stock, while mutual funds and UITFs can be purchased only with their end-of-day value.
So with an ETF, you get the diversification of a UITF or mutual fund combined with the flexibility of stock trading. You can even use peso-cost averaging with an ETF, just like any other stock.
At present, there is the First Metro Philippine Equity Exchange Traded Fund, Inc. (FMETF:PS) which tracks the performance of the Philippine Stock Exchange index (PSEi). With this, expect the performance of the FMETF to be similar to that of the PSEi.
What are the benefits of ETFs?
Imagine an ETF as a pre-packaged Christmas basket where you get pasta noodles, a pack of rice, and canned goods all at once instead of buying them individually. ETFs function similarly in the sense that you have different holdings in one ETF. In relation to FMETF, instead of buying stocks of different companies individually, the FMETF allows you to invest in the different companies of the PSEi without the need for fundamental and technical analyses necessary for investing in individual stocks.
Transparency is another benefit of ETFs. Some mutual funds and UITFs may not give daily updates of what stocks comprise them. Meanwhile, at any time, you can see what the underlying stocks of your ETF are by visiting its website.
3. Lower costs
Investing in ETFs lowers your costs in the sense that the FMETF tracks the PSEi, thus allowing you to invest in different companies at less costs. See below to know how much you would need to invest in the top 5 holdings of the FMETF if you want to buy the stocks individually:
|Security Name||Stock Code||FMETF Weight (%)||Php/share (Sept 01, 2015)||Min. No. of Shares||
Total Investment (in Php)
SM Investments Corporation
Ayala Land, Inc.
Universal Robina Corporation
You would need at least Php 34,235 if you want to invest in the individual stocks above. With the FMETF, you can invest in those companies for as low as Php 1,160 (Php 116/share as of Sept 01, 2015 for a minimum of 10 shares). Take note though that investing in the FMETF makes you a shareholder of the company handling the FMETF and not the individual companies included in the PSEi.
4. Less risk
The FMETF exposes you to less risk because it tracks the PSEi which is composed of the country’s 30 biggest companies. All these companies are blue-chip companies which mean they are well-established and financially stable. In relation to the FMETF, investing in the county’s largest companies minimizes your risks because these companies are known for their longstanding stability and consistent returns.
What are the disadvantages of ETFs?
1. Fewer potential gains
Since the FMETF is the only ETF in the country and this tracks the PSEi, you would be missing out on bigger returns you can reap from speculative or growth stocks; however, if you are new to investing, it is much better to be in a stable position with fewer gains than a riskier, more volatile position.
2. Limited opportunity to learn serious investing
Since ETFs function in the same way as index funds, ETFs will allow you to reap the benefits of investing. But if you want to delve deeper into investing, ETFs are not the way to do so. If you want to be a trader and know the way markets work, study up, create your strategy, and invest in individual assets rather than ETFs.
3. Unlikely to outperform the market
Since an ETF tracks a specific index, it is unlikely that it will outperform said index. If your aims are to beat the market, ETFs may not be for you.
Is ETF investing right for you?
Now that you know the benefits of exchange traded funds (ETFs), you can decide whether they should be in your investment portfolio. Since the FMETF is the only equity-based ETF in the country, you can buy shares of it through your trading account by using its ticker: FMETF. Hopefully in the future there will be more ETFs available from other entities.