Final Rules for ETFs Approved

IN THE NEWS from PhilStar.com

The SEC has approved the final set of rules that would guide the offering of exchange traded funds or ETFs.

ETFs are similar to other kinds of investment funds, but unlike mutual funds and UITFs whose value are computed and posted daily by the issuer, the price of an ETF is determined by how much investors are willing to pay for (and sellers willing to receive for) its shares, just like stocks and other assets that are traded in exchanges.

ETFs are a good alternative to currently available investment funds because they are more liquid (easier to convert to cash) and ideally have lower costs.

According to the article, at least three firms, First Metro Investment Corp., BDO Unibank Inc., and Bank of the Philippine Islands have expressed their plan to offer ETFs.

A copy of the rules may be found here.

Many thanks to reader haezel for the heads up.

ETF Updates

IN THE NEWS from Inquirer.net

It seems that we are now closer to finally having the first exchange-traded funds (ETFs) in the country, with the PSE eyeing a launch before before the end of the year. Perhaps not surprisingly, financial heavyweights BPI and BDO are eyeing to be among the first to offer this mutual fund and UITF alternative.

If you want to learn more about ETFs in the Philippines, you might want to check out this draft of rules and regulations that cover the funds. Of particular interest are the requirements to ensure the transparency of the funds (under Section 22); how I wish we had the same transparency rules for mutual funds and UITFs.

Many thanks to readers Anonymous and Daniel for the heads up.

Concerns Over ETFs

DEAR INVESTOR JUAN

Dear Investor Juan,

I've been reading your blog for the past 2 weeks and boy it's addicting! You got very serious talent in simplifying perplexing financial matters :)

Further to my inquiry, assuming a decent savings amount have been set aside, is it good to start investing in ETFs rather than UITFs/MFs? My colleague argues that ETFs are better than UITF/MF as investors tend to loose a lot from fees on the latter; which I agree to some extent. However, since ETF is yet to break into PH market, I can't help but be wary. I really hope they'll soon open ETF for local investors so we can finally test the waters.

Haezel


Dear Haezel,

First, I would like to thank you for patronizing the blog; I'm glad to hear that you find the posts helpful. :)

I understand how there could be much concern over ETFs because they are new, but as I mentioned in this post, in essence they're pretty much the same as run-of-the-mill UITFs and mutual funds. And in choosing between ETFs, UITFs, and MFs (of the same type), arguably the most important criteria to consider is cost--that is, choose the one with the lowest total fees. In general, ETFs, particularly those which simply track indices like the PSEi, would have lower fees than comparable UITFs and MFs since there would be no need to pay a financial or investment manager (the fund would just be invested in securities that comprise the index it follows). Also, since you can sell your ETF any time, "early redemption" fees don't apply.

One thing that must be made clear, however, is that while the term "ETF" is usually associated with index funds, in theory financial institutions may also offer ETFs that invest in commodities and currencies or even an actively-managed portfolio of securities; such ETFs could have relatively higher fees, so always read the fine print before you invest.

Finally, one distinguishing characteristic of an ETF over other similar instruments is that since its price is determined by supply and demand, it could trade at a significant premium over the index that it is tracking, such as if there is very high interest in the product. In the image above, we see how the Tracker Fund of Hong Kong (orange) has deviated from the Hang Seng Index (green) which it is tracking since sometime in 2009. If an ETF is priced priced significantly higher than the index, then it may be best to avoid buying the product (and sell if you have it).

If and when ETFs are finally sold in the Philippines, two things may happen: either investors will shun offerings because of lack of understanding, or be curious enough to embrace them. While each scenario may have its disadvantages, I'm rooting for the latter to happen. We are way behind the rest of the world when it comes to financial innovation, either due to conservatism or simple incompetence (or maybe a combination of both), and ETFs are a step moving forward. Done right, ETFs should be able to provide Filipinos investors, both in the Philippines and those living abroad, with a cost-effective and manageable way to participate in the growth of the country.

SEC Seeks Comments on ETF Rules

IN THE NEWS from Business World Online

As draft rules that allow the listing of exchange-traded funds or ETFs on the Philippine Stock Exchange have been completed, the Securities and Exchange Commission (SEC) now solicits comments from market participants before finalizing the measure. The draft includes provisions that classify ETFs as a new investment product, thus allowing issuers to hurdle old rules that only recognized more traditional financial instruments, the SEC said.

This latest development moves us closer to having a more inexpensive and more liquid alternative to traditional UITFs and mutual funds. Learn more about the advantages of ETFs over comparable investment vehicles in this post.

Thanks to reader Neil for the heads up.

ETFs and REITs for Investors Abroad

DEAR INVESTOR JUAN

Dear Investor Juan,

I've been following your blog for quite sometime and I really find it very informative. Just this month I started working here in Singapore and I would like to explore some investment opportunities here. I am particularly interested in ETFs and REITs and have been reading about them. However, I am having some difficulty in understanding since most of the explanations online are too "technical". I hope you can enlighten me.

Thank you.

Syd


Dear Syd,

Exchange traded funds or ETFs and real estate investment trusts or REITs are popular investment vehicles in more developed markets abroad such as Singapore, as you have mentioned, Hong Kong, and the US. They were designed to give "ordinary" investors like us an opportunity to invest more efficiently, so it's important that we learn as much about these investment instruments as we can.

I actually already discussed these topics in previous posts, but I don't mind discussing them again here briefly, and hopefully more simply.

Exchange traded funds

There are perhaps a hundred different kinds of ETFs available in the market, but the simplest are just pools of funds that are invested in either stocks or bonds, just like UITFs and mutual funds. There are two important differences between ETFs and UITFs and mutual funds, however. One is that ETFs are close-ended, meaning they have a fixed number of available shares and regulatory approval is needed before additional shares could be issued, unlike UITFs and mutual finds which are open-ended. Another difference is that ETFs are traded in stock exchanges whereas UITFs and mutual funds may only be sold back by investors to the issuing bank or financial institution; the implication is that whereas UITF and mutual fund unit/share prices only change daily, ETF prices change as they are traded, in real time.

Perhaps the most popular ETFs are index ETFs, be it stock or bond. A stock index ETF in Hong Kong, for example, would mimic the movement of Hong Kong's Hang Seng index by being invested in the component stocks of the index, much like equity UITFs and mutual funds. However, since index ETFs are not actively managed unlike comparable UITFs and mutual funds since the proportion of each stock in the fund is based on the composition of the underlying index and not determined by a professional fund manager, they are significantly cheaper; this is the main reason why we often hear investment gurus recommend index ETFs to investors. Finally, ETF investors earn as they do from stocks, from dividends and capital gains.

Real estate investment trusts

REITs are an important financial innovation in recent history. They give ordinary investors the ability to diversify into real estate-backed assets without having to shell out a huge amount of capital. Basically, a
REIT is pooled capital that is invested in income-generating real estate projects like commercial buildings or malls; investors participate by buying shares of the trust, which are also traded in stock exchanges, and also earn from dividends and capital gains.

While there also are investment funds like UITFs and mutual funds in countries like Singapore, ETFs and REITs often offer better and more inexpensive opportunities to diversify, so you might want to consider them first. A big portion of my capital here in Hong Kong is actually invested in a stock index ETF and a REIT, and I'm not worried a bit about these investments despite the global financial uncertainties we currently face. I'm not exactly sure how things are in Singapore, but as far as I know stocks are relatively cheap, in general, so it might be a good time to invest in a stock index ETF now; and I remember reading somewhere that the real estate market in Singapore is healthy especially compared Hong Kong's and China's, so it might be a good idea to buy some REIT shares as well (you have to do your own research about this first, of course). You may want to take a look at this previous post where I discuss specific investment alternatives in Singapore.

I hope you now have a better idea of what ETFs and REITs are, and are now hopefully confident enough to seriously consider investing in these assets. Good luck!

Investing in Singapore, Part 2: The Devil is in the Details

DEAR INVESTOR JUAN

Just to recap, in Part 1 we pretty much established the following things:

1. 50,000 pesos should be enough to start investing.
2. Invest in the long term.
3. Investing in a business in the Philippines is not advisable if you're working/living abroad.
4. If you're working/living abroad, better just invest where you are (in Jay's case, Singapore) so you can be more hands on.

Now we're ready to go into the nitty-gritty of investing in a more developed Asian market like Singapore.

5. Next step? Open an Internet banking account with your bank, in your case Jay, DBS. One important advantage of investing in countries like Singapore is convenience; Singaporean banks allow depositors to invest using a single bank account with an Internet banking service, unlike banks in the Philippines where investments can only be done over-the-counter, or with a separate trading account like in the case of BPI Trade.

6. Check out the the available investments. Looking at the investments page of the DBS website, we see that the bank offers three product types to individual investors: unit trusts, structured deposits, and treasury products.

Unit trusts are the same as the UITFs we have in the Philippines, and you'll find a more informative and user-friendly list from DBS's Asset Management website.

Structured deposits are derivative investments whose value depend on underlying assets, like bonds or stocks. Basically, it's a bet that the price of some asset, or anything that fluctuates like foreign exchange rates or interest rates, will move a certain way.

What DBS refers to as "treasury products" actually covers a diverse group of securities like currencies (the real thing), currency-linked investments (derivative investments, just like structured deposits), and government and corporate bonds.

7. So many, so complicated. What to choose? Since you're just starting out, I suggest that you stick with the more traditional investment funds offered by DBS, those that are invested in stocks, bonds, or a combination of both. Derivatives like structured deposits and currency-linked investments are too risky and complicated, in my opinion, for ordinary folk like you and I. And one important investment advice we can get from Warren Buffet is to never invest in something you don't understand.

In choosing the best fund for you, you can start by looking at the fact sheets from the DBS Asset Management website, like this one for the MyHome Fund - HomeSteady fund (sounds tailor-made for you, ain't it, Jay?). It turns out that there's nothing special about the fund, except the name: it's just an 80/20 combination of a Singapore stock index ETF and bond index ETF (in case you missed the article about ETFs, click here). This means, instead of paying 3% up front and 0.5% every year for a fancy-sounding investment fund, you can actually brew your own combo by investing in the ABF Singapore Bond Index Fund and DBS Singapore STI ETF on your own, at whatever proportion that suits your fancy (just remember the rule of thumb: higher risk, higher return if you invest all in stocks) with significantly lower fees.

These two index ETFs are cheap, good-enough funds to start with; all the others are too expensive, in my opinion. When you do get the hang of investing and are willing to take on more risk, then you can start investing in individual stocks by opening a DBS Vickers Online account, which will also give you access to investments in other markets like Hong Kong, Canada, and the US. Then, as they say, the world will have become your oyster. :)

One last thing. Since you're an account holder, you can always ask the DBS customer service reps questions about the specifics of opening accounts and investing in funds. Don't hesitate to take advantage of what you're entitled to.

5 Things You Need to Know About Exchange Traded Funds

INVESTMENT SPOTLIGHT

On Friday, I decided to buy Hong Kong securities for the first time. Most of you know that I'm an ardent opponent of stock picking, so to put my money where my mouth is, I decided to go by the way of diversified investment funds. Like all other commercial banks in Hong Kong, Hang Seng Bank, where I decided to open and maintain an account, offers a more exhaustive and thorough list of securities and investment services than the banks in the Philippines. For my particular investment preference, aside from open-ended investment funds (which are basically the same as the mutual funds and UITFs we have back home), Hong Kong banks and other financial institutions also offer exchange traded funds or ETFs, which is something we don't have in the Philippines.

On Friday, I bought 100 shares of Hang Seng Bank's Hang Seng Index ETF (stock code 2833) at the prevailing market price of 233.20 HKD per share. At the end of today's trading, the stock closed at 240.00 HKD per share, netting me gross paper gains of 680 HKD over the weekend, or 3,772.67 pesos. Not bad at all, but of course that's mostly due to luck than anything else.

So what are these ETFs, and why are they so popular in a lot of markets around the world? And how are they different from the more familiar mutual funds and UITFs that we have in the Philippines?

1. ETFs are investment funds that can be traded in stock exchanges, unlike mutual funds and UITFs that may only be sold by and redeemed through financial institutions like banks. Also, ETFs are closed-ended, with a fixed number of outstanding shares available, unlike open-ended mutual funds and UITFs; this is what makes trading ETFs in stock markets possible.

2. ETFs are also invested in underlying securities like stocks, bonds, and other instruments, like other investment funds. The ETF I purchased tracks the Hang Seng Index of the Hong Kong stock exchange, and is thus invested in the component stocks of that index.


3. ETF share prices are determined by the market. The share price of ETFs are driven by supply and demand forces, unlike open-ended funds whose net asset values (NAV) are computed at the end of each trading day. Therefore, while a lot of ETFs are designed to closely follow the movement of certain indexes, ETF returns can still deviate significantly from the performance of the underlying assets or index.

4. ETFs are much cheaper than other investment funds. While a lot of open-ended investment funds in Hong Kong charge around 3% per year in fees, ETFs are just covered by the usual trading charges, which amount to just around 0.6% per transaction. Therefore, if you are a firm believer of passive over active investment, then ETFs are the way to go since you won't have to pay for high management fees.

5. ETFs pay dividends to shareholders, unlike mutual funds and UITFs that reinvest all gains back into the fund. For example, the HSI ETF I bought has a historical dividend yield (dividends divided by the share price) of 2% per year. This yield makes up a portion of the total returns earned by investors, on top of capital gains when the share price appreciates.

It's unfortunate that ETFs are not available to investors in the Philippines; the funny/frustrating thing is that an ETF based on Philippine stocks has already been made available in international exchanges for international investors, but it's not available to us poor Investor Juans. Still, there are rumors that ETFs will soon be introduced in the Philippines. Would you be interested in buying some when they do become available?