What is the history and global
performance of ETFS?
Exchange Traded Funds debuted in 1993 when
State Street launched the SPDR S&P 500, an equity
index fund tracking the S&P 500.
Shortly after, ETFs gained popularity and other
forms of ETFs were developed, such as bond index
and commodity ETFs.
In 1999, the first ETF in Asia was introduced when
the Hong Kong Tracker Fund was launched.
Europe’s first ETF started two years later, in 2001,
with its Euro STOXX 50.
As of March 2013, there are about 4,964 ETFs
worldwide with assets amounting to approximately
USD2,059.6Bn.
What are ETFs?
 Mutual funds or
collective investment
schemes whose shares
can be traded in a stock
exchange
 Provide investors with
diversification and lower
expense ratios compared
to other actively
managed funds
 Feature the tradability of
other ordinary stocks
with more transparent
pricing
Assets Under Management (AUM) of ETFs: 2001 – Q12013
USDMn
CAGR
Asia Pacific
Global
GLOBAL
 Number of ETFs: 4,964
 ETF Assets: USD2,059.6Bn
2
24.93%
28.17%
ASIA PACIFIC
 Number of ETFs: 554
 ETF Assets: USD144.6Bn
UNITED STATES
 Number of ETFs: 1,822
 ETF Assets: USD1,533.5Bn
What are
Exchange
Traded Funds?
What are the different kinds of ETFs?
The most basic ETF type is the index ETF, which aims to track a benchmark
index. For discussion and illustration purposes in this document, equity
index ETFs will be used.
What is an index?
An index measures the value of a section of the stock market. The most
commonly used index is the market-value/market-capitalization weighted which
uses the highest weighted stocks in the index to measure the total value of the
listed stocks in an exchange.
In the Philippines, the main stock market index is the PSEi composed of stocks
from different sectors. It is comprised of 30 fixed stocks, reviewed and rebalanced
twice a year.
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How do ETFs differ from Mutual Funds and UITFs?
Issue
ETFs
Mutual Funds
UITFs
Minimum
Investment
If bought through the
exchange, minimum
investment would be
dependent on price
and board lot
Dependent on fund
manager (by law, the
minimum investment
is PHP5,000)
Dependent on fund
manager
Intraday
Trading
Can be traded
intraday at market
price; price guidance
through iNAV
disclosure every
minute
Purchase at NAV which
is calculated at end-ofday
Purchase at NAV
which is calculated
at end-of-day
Fund
Management
Generally passive
Usually active
Can be both
Entry and
Exit Costs
Similar to trading a
stock – brokers
commission,
transaction fees, etc.
Front-end load, backend load, redemption
fee
Early redemption
fee
Management
fees
Lower management
fees
Higher management
fees
Higher trustee fee
Redemption
Cash and/or in kind
Cash
Cash
Who are the parties to an ETF?
PARTY
RESPONSIBILITY
Issuer
ETF company; continuously issues and redeems shares of stocks
Fund Manager
Manages the fund, oversees day-to-day operations
Market Maker
Provides bid and ask quotes to ensure liquidity
Authorized
Participant
Accepts and collates orders from brokers and institutions for creation
and redemption of new ETF shares
iNAV Calculator
Calculates and supplies the intraday NAV of the fund
Custodian
Takes physical custody of the shares comprising the underlying basket
Index Provider
Source of the index; entity whose index is used by the ETF
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Why invest in ETFs?
What are the
advantages of ETFs?
 Diversification
 Transparency
 Liquidity
Diversification
An ETF share gives you exposure to all the component shares
that make up the ETF basket at a lower cost.
Broad Asset Allocation
Investing in various ETFs allows you to address any gap in your
portfolio in terms of industry or asset exposure.
Effective Short-term Flexibility
ETFs can be traded like a listed share during trading hours.
Transparency
Information on component securities are publicly available. You
can easily access the information from the website of either the
PSE or the listed companies.
What do I consider when choosing ETFs?
ETF Structure
What body regulates the ETF company? How is the
index designed? Are derivatives used?
Index Methodology
What index is the ETF tracking? How does this index fit
your portfolio? What underlying shares are covered by
this index?
Total Costs
What are the relevant fees, charges and taxes?
Tracking Error
How precisely does the ETF track the index?
ETF Fund Manager
What is the fund manager’s track record and history?
How do I invest in ETFs?
Investing in ETFs is easy.
 First, you need to allocate funds that you want to invest.
REMEMBER: Your minimum investment will depend on the price of the ETF and
the PSE board lot.
 Second, register with any of the 134 PSE brokers.
 Third, start buying and selling the ETF shares, just like any listed stock!
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Q:
What’s good about investing in ETFs?
A:
Investing in ETFs has numerous pros which include immediate exposure to
the broad market without having to choose a single stock, automatic
diversification of your portfolio, lower management fees, flexibility, no
minimum entry fee and transparent pricing.
Q:
Why would I buy an ETF when I can get an index mutual fund without a
broker?
A:
As they are passively managed, ETFs will allow you to invest in a diversified
portfolio with lower management fees versus mutual funds. In addition, ETFs
can be bought and sold any time of the day using prevailing market prices
through an exchange, whereas mutual funds can only be bought and sold
using end-of-day NAV.
Q:
What will happen to the dividends declared by the constituent stocks of an
equity index ETF?
A:
The dividends may either be paid out by the ETF or reinvested.
Q:
Will I be able to beat the index if I invest in ETFs?
A:
The main goal of ETFs is to track the index and not beat it.
Q:
Why will I want to match the market using an index fund when I can beat it
with an outperforming mutual fund?
A:
Although mutual funds may outperform the market, beating the index,
however, is not certain and always has associated risks. Also, actively
managed funds, by nature, have higher management fees than passively
managed ones.
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Q:
If the ETF is tracking an index, will all the stocks in that index be included?
A:
Not necessarily. There are three options to create a portfolio. One of which is
full replication, wherein the basket will be composed of all assets in the
index. The other option is sampling or optimizing, wherein the basket will
only be comprised of a portion of the index. The last option is the synthetic
index which makes use of derivatives. In the Philippines, synthetic index is
not allowed yet.
Q:
What are the risks?
A:
As with regular stock investing, your ETF investment will also be dependent
on favorable market conditions and subject to market volatility.
Q:
Are ETFs only for stocks?
A:
You must be asking if ETFs can only use stocks as its component securities.
The answer is no. Component securities of ETFs may include any asset class
which has a published index and which is liquid. Nowadays, bonds, real
estate and even gold ETFs are already available.
Q:
Where can I buy ETFs?
A:
Just like other listed stocks you may buy ETFs at any brokerage firm. For
block orders, you can go to any authorized participant.
Q:
How much is the minimum investment for ETFs?
A:
When you buy ETF shares in the exchange, there will be no minimum
investment required. You will, however, be bound by the minimum board lot
size which is prescribed by the PSE. Minimum board lots depend on the price
of the ETF shares.
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This material is intended only to provide information regarding the
First Metro Philippine Equity Exchange Traded Fund. IT IS NOT TO
SOLICIT INVESTMENTS IN THE FUND. Each person contemplating
investment in the fund must make his own investigation and analysis
of the risks in investing in a listed mutual fund.