Dec2013 is the target launch for the first exchange traded funds or (ETFs) in PSE. First Metro Investment Corp (FMIC) will be the first one (pun intended) to offer ETFs in the country.
What are exchange traded funds anyway?
These are funds traded in our exchange, which is the PSE. Haha! Or hybrid of stocks and mutual funds / UITF.
But seriously, these are funds similar to UITF or mutual funds but are readily tradable in PSE just like any listed stock. Most likely it will also have its own stock code and board lot parameters. But it does not pertain to one particular stock but pertains to a fund such as index equity fund, bond fund etc. These investments are more liquid and net asset value per unit (NAVPU) is known real time so buying and selling can be done in a jiffy. Unlike in UITF or mutual funds wherein NAVPU are announced after business hours, where buying takes effect the next day and where sell proceeds only become available after 3 days. In this sense, ETFs are more liquid.
Since this is traded during PSE trading hours, price is driven by the market through its supply and demand and (can’t be avoided speculation). Is it like the market is weighing in on how much the funds, such as index fund, being sold by the broker (such as FMIC) will perform.
What funds are this? Right now FMIC plans to launch an index equity fund which is a PSE tracking fund. FMIC says that approximately 80% of the fund will be invested in the same stocks that comprise the PSE index while the remaining 20% in other marketable securities. See related article here. As such owning a fund allows you to invest in a basket of stocks, a basket of our country’s most actively traded stocks.
Just for our information, below is the composition of the PSEi as of 08Nov2013, from PSE website. In buying a single ETF share, you can own portions of these 30 stocks, which is good for diversification. Instead of buying each of them individually.
How does this differ from equity funds in UITF and mutual funds? Aside from liquidity, an index fund tracks the PSEi movements which is a basket of 30 stocks whereas normal “equity funds” are invested in stocks but not necessarily those part of the PSE index or just portions of it (e.g. 8 to 10 stocks only). Which stocks are this? Your bank or fund manager for mutual funds and UITF disclose which stocks they invest in so go check their website.
Another example of an equity fund but not necessarily index tracking is the “high dividend equity fund” which from the name invests in stocks that give out high dividends. Again such stocks need not be part of PSE index or PSEi.ETF looks promising in a sense that it allows small market players to have positions in various stocks even with limited budget. ETFs provide diversification and enable us to buy a basket of multiple stocks at lower transaction and investment costs.
Let’s see more by Christmas season how this basket fares. This is definitely worth looking into. Do you think it will eat up the market of mutual funds and UITF? Probably some share of it but I would think ETF appeals to a slightly different market than mutual funds and UITF. With UITF investments are less frequent and are less liquid so we tend to rely on the investment managers to make it grow. Whereas in ETFs, buying and selling can be driven by retail investors themselves. As such ETFs may be for more aggressive active investors while UITFs for passive ones. Just my 2 cents. But we’ll see!
Photo: “The First Basket Finished“ by poppet with a camera This work is licensed under a Creative Commons Attribution 3.0 Unported License.