I usually read or hear that Exchange-Traded Fund (or Index Fund) is a way to go for investors who want to maximize returns because it’s diversified at a low cost. Well, that’s the case for our friends in U.S. because they have access to investments that has low Expense Ratios. Sadly, that’s not the case here in the Philippines.
What is Exchange-Traded Fund?
An ETF, or exchange-traded fund, is a marketable security that tracks an index, a commodity, bonds, or a basket of assets like an index fund. Unlike mutual funds, an ETF trades like a common stock on a stock exchange. ETFs experience price changes throughout the day as they are bought and sold. ETFs typically have higher daily liquidity and lower fees than mutual fund shares, making them an attractive alternative for individual investors.
Here in the Philippines, there is only one ETF, which is the First Metro Philippine Equity Exchange Traded Fund or FMETF. Initially, I felt glad that this type of investment is already available here, so I bought some shares. But upon researching about the true cost of investing in FMETF, I wish that I didn’t.
Because diversified and low cost are two words that is only applicable in U.S. setting, not in the Philippine setting (at the moment—yes, I’m not losing hope).
Don’t believe me? Let’s breakdown the fees, shall we?
Since it is traded in the stock market, an investor is charged with trading fees upon investing in FMETF. The fees are the following based on the fess charged by COL:
- Commission = 0.25% of the Gross Trade Amount or a minimum of Php20.00
- Value Add Tax (VAT) = 12% of Commission
- Philippine Stock Exchange Transaction Fee (PSE Trans Fee) = 0.005% of the Gross Trade Amount
- Securities Clearing Corporation of the Philippines Fee (SCCP) = 0.01% of the Gross Trade Amount
Price Per Share as of October 2, 2018 is: Php107.00; and
Board Lot is: 10
- Commission: Php107.00 x 10 x 0.25% = Php2.68, but since the commission fee has a minimum charge of Php20.00 per transaction, the commission is = Php20.00
- VAT: Php20.00 x 12% = Php2.40
- PSE Trans Fee: Php107.00 x 10 x 0.005% = Php0.05
- SCCP: Php107.00 x 10 x 0.01% = Php0.11
But the cost doesn’t end there. Since the fund is managed by First Metro Asset Management, Inc. (FAMI), there is a Management Fee. To see the underlying fees, an investor is advised to dig deeper (i.e. read Annual and Quarterly Reports filed in SEC).
Here’s what you’ll find if you do:
(For mobile phones, illustration below is best viewed in landscape mode.)
Seeing this, I don’t think investing in FMETF is low cost (one criteria I consider when it comes to investing). Index Fund in the Philippines are no different. The Management or Trust Fee has a minimum of 0.75% p.a.—a far cry from Expense Ratios in the U.S.
As I said before, I believe that an individual investor’s best shot for a low-cost investing here in the Philippines is a Self-Managed Portfolio using an Ideal Lot.*
*This is more applicable if the investor opts to invest in just a few companies. If an investor wants to take part in the growth of the companies included in PSEi (there are 30!) but that investor doesn’t have time to study those companies, I believe that that investor is better off with an ETF or an Equity Index Fund. Besides, studying and monitoring 30 companies isn’t practical for any individual investor.
Yes, you can choose simple even in investing.