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Saturday, December 14, 2013

Things You Should Know About Exchange Traded Funds (ETF)

In a recently concluded Exchange Traded Fund (ETF) seminar in Manila, Juanita Cueto, Commissioner for Securities and Exchange Commission made a fearless forecast that ETFs will be the next big thing in the Philippine investing industry. "There is no better time than now to educate investors on this product", she said in her keynote address on the said event. Others speakers agreed that availability of ETFs can spur growth in the country and may even attract more investors.

In this article we will list down the basics of ETFs and hope to answer why investment professionals are optimistic about this type of investment.

What is an exchange traded fund?

From the PSE website, Exchange Traded Fund or ETF is an open-end investment company that trades its shares in the stock exchange. It works similar to a mutual fund in that it is comprised of a basket of securities. The main difference is it is readily traded into an exchange similar to a stock.

There are different kinds of ETFs - currency, commodity, bond, derivative. We will focus our discussion on equity index ETF, which is the only available exchange trade fund in the country so far.

Equity Index ETF

An index serves as an indicator to measure the performance of a group of securities. The main stock market index for the Philippines is the PSEi which is comprised of 30 of the largest and most liquid stocks. You can view the full list of stocks included in PSEi here. Sector indices such as Property, Financials and Mining and Oil are also examples of an index.

Equity Index exchange traded funds are comprised only of the listed companies in the PSEi and as such would mostly resemble the index performance.

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1. Diversification. Investing in ETF allows you to invest in the component shares that make up the ETF basket at a lower cost. Imagine if you only have 5,000 pesos to invest. At most, you can only buy two different company's stocks, where in ETF, you own stocks which are currently included in the ETF basket. It also allows you to be exposed in more industries, giving you more cushion in cases where a certain sector is lagging.
2. Flexibility and Transparency. Since the fund is listed in the exchange, it can be traded like any other listed shares. It also allows for more transparency as information are made publicly available. The ETF company is also required to disclose the composition of securities at any given time.

In Summary:
An ETF company can be basically viewed as like any other listed companies in that it can be bought and sold during trading hours and its prices and volume change. It can also opt to declare and pay dividends. If Ayala Land's main business is to develop and build properties, then an ETF company is to pool funds and invest it in stocks included in PSEi composite index.

As of March 2013, there are about 5,000 ETFs worldwide with assets amounting to 2.1Billion US dollars. Currently, only First Metro Asset Management, Inc. offers exchange traded funds. It was officially listed last Dec. 2, 2013 and has a trading symbol FMETF. Although the Philippines has just started to offer ETFs and it remains to be seen how well it would prosper, this is a good step in attracting more investments to have a more sustainable economic growth.

disclaimer: This post is for informational purposes only and is not a solicitation to invest in ETF. The author is not connected with FAMI or any of its affiliates.

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