Investment Products and Services

Exchange Traded Funds

What is an ETF?

An Exchange Traded Fund (ETF) is an open-end investment company that trades its shares in the stock exchange. An ETF company issues its shares in blocks called Creation Units in exchange for a basket of securities comprising the index it wishes to track. Creation is normally done by institutional investors, who break down the block into smaller portions and sell to retail investors in the Exchange.

ETFs have become one of the fastest growing investments in the world because they are simple to understand and provide opportunities for investors to create a diversified portfolio of stock with lower investment costs. Various funds have also set up ETFs because they are simpler to administer and have lower expense requirements compared to mutual funds or unit investment trust funds.

What is an INDEX?

Index is an indicator to measure or monitor the performance of a group of securities. For the PSE, its main index is the PSEi, which is composed of 30 of the largest and most liquid stocks.

Why invest in ETFs?

ETFs provide numerous advantages and benefits to investors, as follows:

Investors can diversify their investments in stocks with minimal capital outlay, allowing smaller retail investors to have access to blue chip companies. Diversification is an investment strategy that allows attainment of long-term goals while minimizing risk.

Investors, especially those who do not have enough time to monitor the stock market, can enjoy the returns of the overall market without having to actively manage their portfolio.

Because ETFs are traded in the Exchange, investors can find out the ETF price in real-time; they no longer have to wait for end-of-day.

Unlike other investment funds, ETFs have no sales-load commissions.

Some investment funds require a holding period and impose a surcharge on pre-termination. ETFs do not have this restriction, as it may be purchased and sold anytime during trading hours.

Investors know the composition of securities the ETF company has (i.e. the index components). Other investment funds may opt to actively manage the fund and change the composition of its investment in securities without the prior knowledge of the investor.

ETFs present new opportunities for participants to earn returns through arbitrage, making this product attractive to institutional investors.

Investors can return the ETF shares in quantities of the Creation Unit in exchange for the underlying shares (i.e. the basket of securities).

Mutual Funds and Unit Investment Trust Funds

Investors who want to earn from stocks or bonds may find it difficult to actively trade or monitor the daily values of these securities. To address this problem, investors who lack time or expertise may instead choose to put their money in Mutual Funds or Unit Investment Trust Funds (UITFs).

Mutual funds and UITFs are collective investment schemes wherein funds from various investors are pooled together into one fund to achieve a specific investment objective. The funds are then entrusted to a professional investment manager who manages a diversified portfolio that may consist of stocks, bonds, and other investment assets.

The fund makes money from the appreciation in value of the assets owned by the fund and the dividends and interest it receives from the securities held. These incomes less fees and fund expenses are then passed on to the investor.

What are mutual funds?

In the Philippines, mutual funds are open-ended investment companies which means shares can be bought and redeemed at any time. Investors of mutual funds buy shares, making them shareholders of the investment company. As part-owners, mutual fund investors are entitled to shareholder rights such as the right to vote and the right to receive dividends.

What are UITFs?

UITFs are also open-ended investments schemes but instead of buying shares, investors buy units of investment. As such, they do not become shareholders of the bank. Their participation is limited only to their share in the incomes or losses of the investment fund.

Mutual Funds vs UITFs

Mutual funds and UITFs are similar in nature but they differ in a few aspects. The two are both collective investment program but mutual funds are offered to the public by investment companies while UITFs are product offerings of banks.

Mutual funds and UITFs both use marked-to-market valuation, wherein the investment portfolio is valued using the market prices of each asset owned. Using marked-to-market valuation, the price of each unit of UITF (called Net Asset Value per Unit or NAVPU) or the price of each share of mutual fund (called Net Asset Value per Share or NAVPS) can be determined. The formula to compute these prices is Net Asset Value, or the market prices of assets less liabilities, divided by total outstanding units or shares of the fund.

In terms of regulation, mutual funds are governed by Republic Act No. 2629, also known as the “Investment Company Act,” and are regulated by the Securities and Exchange Commission (SEC). On the other hand, UITFs are regulated by the Bangko Sentral ng Pilipinas (BSP).

Both mutual funds and UITFs are not covered by the Philippine Deposit Insurance Corporation (PDIC).

Investing in Mutual Funds & UITFs

Advantages

These two collective investment schemes provide good investment opportunities because of the following features:

Professional Management. Investors no longer need to be burdened with issues such as asset selection and monitoring because their funds are entrusted to and managed by a full-time professional fund manager.

Diversification. Combining various assets in a portfolio offers investors higher returns because risks are spread out and the negative performance of one asset may be compensated by the positive performance of another. Since mutual funds and UITFs have large asset base, these funds can invest in assets that may not normally be accessible to individual investors. This can increase the profit potential and also lower the investors’ risk.

Economies of Scale. Individual investors who purchase and trade several assets incur large amount of fees. In mutual funds and UITFs, these costs are shared among all investors, drastically reducing the individual’s costs of transaction.

Liquidity. Shares of mutual funds and units of UITFs are highly liquid, meaning they can easily be bought from and sold to the fund at any time.

Low Minimum Investment. In the Philippines, a mutual fund can be purchased for as low as P5,000 per share while investors can invest in UITFs for as low as P10,000 per unit.

Disadvantages

Of course like any other investment asset, mutual funds and UITFs also have drawbacks and risks.

Investment Risk. Returns in mutual funds and UITFs are not guaranteed and the possibility of loss may be expected. The value of the fund is dependent on the value of the assets in the portfolio and some assets may underperform and generate losses for the fund.

Overdiversification. In the process of investing in a variety of assets, some funds tend to overdiversify, wherein the fund acquires many assets that are highly related, reducing the benefits of diversification.

Costs and Fees. Mutual funds and UITFs charge several costs and fees that eat into the individual investor’s profit. These include the annual management fee, which represents the compensation of the fund manager, and other administration and investor relations expenses. Most mutual funds also charge a fee to enter the fund (called “entry sales load” or “entry fee”) or exit the fund (called “exit fee” or “redemption fee”). UITFs usually do not have entry fees but may charge an early withdrawal fee if the units are withdrawn within a certain period.

Types of Mutual Funds & UITFs

There are four (4) types of mutual funds and UITFs in the Philippines.

1. Equity or Stock Funds

These funds invest primarily in the shares of publicly-listed corporations. The fund objective is capital appreciation or long-term capital growth.

2. Bond Funds

Bond funds invest primarily in fixed-income securities issued by the government or large corporations. Examples of fixed-income securities include bonds, Treasury bills, and Treasury notes. The objective of the fund is to provide current income that is consistent with preservation of capital and liquidity.

3. Balanced Funds

Balanced funds invest in a mixture of equities and fixed-income securities. The goal is to provide total return consisting of a high level income that is consistent with preservation of capital, liquidity and long-term capital appreciation.

4. Money Market Funds

Among the four types of mutual funds in the country, money market funds provide the least amount of risk. Its goal is to provide current income by investing in short-term securities with portfolio duration of one year or less. These may include short-term government securities, special deposit arrangements, and time deposits, among others.

Personal Equity Retirement Account

Q: What is a PERA?
A: A Personal Equity and Retirement Account, popularly known as PERA, is a long-term voluntary retirement account that encourages individuals to save and plan for their retirement while enjoying the tax incentives both from the amount contributed to the PERA and the income from PERA investments.
 
Q: When was PERA signed into law?
A: The PERA Act of 2008 was signed into law on August 22, 2008 and tax incentives became effective on January 1, 2009.
 
Q: Is PERA similar to the 401(k) Plan and Individual Retirement Account (IRA) of the United States?
A: Yes. Similar to what is known in the US as the 401K and IRA, PERA provides alternative investment opportunities for all.
 
Q: Why should I open a PERA (account)?
A: If you are dreaming of a comfortable and hassle-free retirement, opening a PERA account will be extremely beneficial for you for the following reasons:

Your annual contribution—if within the maximum limit and kept in PERA until age 55—will be entitled to a 5% income tax credit. In other words, if you max out your contribution to PHP100,000, you get to deduct PHP5,000 from your annual taxable income.
All income earned from your investments and reinvestments upon reaching retirement or death are tax exempt.

Unlike your regular contributions to the GSIS and SSS, you will have full control over your PERA. You can make all the investment decisions, choose where your money goes, and grow it faster.

Q: What if I am already 55 years old or older, can I still open an account?
A: Yes, you can still open an account even if you are already 55 years or older. However, the tax benefits kick in only if you have contributed in your PERA for 5 years.
 
Q: How much can I contribute to PERA?
A: Annually, you can contribute a maximum of PHP 100,000 if living in the Philippines, and PHP 200,000 if living and working overseas. Married couples in the Philippines can contribute a maximum of PHP 200,000; while those living and working overseas, PHP 400,000.
 
Q: What if I want to put in more than the prescribed maximum annual PERA contribution?
A: You may contribute an amount exceeding the prescribed maximum annual contribution but the excess will no longer be entitled to the 5% tax credit.

Q: Who can open a PERA?
A: An individual who is employed or self-employed, of legal age, in the country or overseas, earning an income, and with a Philippine Tax Identification Number (TIN) can open a PERA. A person who opens an account is called a contributor.
 
Q: Can I still open an account if I am below eighteen (18) years old?

A: Yes. Individuals below 18 years old may open an account through a guardian.
 
Q: How do I start investing in a PERA?
A: First, you need to get an administrator who will oversee your account. Your administrator can be a securities broker, bank, mutual fund company, insurance company, or any other financial-related institution accredited by the Bureau of Internal Revenue (BIR). You can only have one (1) administrator for all your PERAs.
 
Once you have assigned an administrator, you may now choose a custodian who will receive the funds you contribute. Your custodian could be an investment manager or a trust entity accredited by the Bankgo Sentral ng Pilipinas (BSP). The custodian will operate independently from the administrator.
 
With the guidance of an administrator and a custodian, the contributor may now choose which PERA investment product to invest in.
 
Q: What are the available PERA investments products I can choose from?
A: You may invest in the following investment products:

Shares of stock and other securities listed and traded in the local exchange
Unit investment trust funds (equity funds, balanced funds & others)

Mutual funds (equity funds, balanced funds & others)
Annuity contracts
Insurance pension products
Pre-need pension plans
Exchange traded bonds

Others (for more details, see PERA Act of 2008 Implementing Rules and Regulations)

Just remember to choose wisely and put your money where it will have higher potential earnings.

Q: How many investment products will I be allowed to invest in?
A: You can open a maximum of five (5) PERAs with one administrator at any given time. This allows you to explore and to experience different investment products where you can best grow your retirement funds.
 
Q: When can I withdraw my PERA contributions?
A: You are entitled to receive distributions from your PERA when you reach the age of fifty-five (55) or when you have already made contributions to your PERA for at least five (5) years.

Q: Will I be penalized in case I withdraw my contributions prior to my retirement?
A: Yes. In case you withdraw before the period of distribution, you will have to pay a penalty to the government which shall not be less than the tax incentives enjoyed.
 
You will only be allowed an early withdrawal without a penalty if distributions will be made for payments to a contributor hospitalized for more than thirty (30) days, and if rendered permanently totally disabled.

Q: How will payments be made?
A: You may choose to be paid either in lump sum or pension for a definite period or for a lifetime.
 
Q: After I have withdrawn my contributions at fifty-five (55), what will happen to my PERA?
A: You may choose to continue your PERA even beyond the age of fifty five (55), but your complete contributions will be given upon and after your death.
 
Q: What will happen to my PERA if I die before the age of fifty five (55)?
A: If you die before reaching fifty-five (55) or any other age for that matter, your administrator will terminate your account and all your contributions will go to your lawful beneficiaries without going into probate (a legal process that typically delays the release of money).

Q: Will my employer be required to contribute to my PERA?
A. Your employer will not be required to contribute to your PERA, but they are encouraged to do so for enhancement of employee benefit packages on top of the SSS and GSIS contributions. Employers’ PERA contributions will be deducted from their taxable income. 
   
Even if your employer contributes to your PERA, you still have full control over all your PERA assets.
 

Q: If an employer contributes to the PERA of its employees, does that exempt the employer from SSS and GSIS contributions and retirement pay under the Labor Code of the Philippines?
A: No, employers are still required to comply with the mandatory SSS and GSIS contributions and retirement pay under the Philippine Labor Code.
 
Q: Is PERA transferable?
A: No, it is non-transferable. PERA cannot be used to secure indebtedness, therefore, creditors cannot run after PERA assets, and courts cannot attach, garnish or seize those to enforce a court judgment.

Investment Instruments

Bonds

Bonds are long-term debt instruments issued by either a corporate or government entity for a specific period of time and interest rate. Funds stemming from the issuance of this instrument are used to finance the activities of the issuing entity. Tenure for the security ranges from a year and can extend to more than ten years. Bonds are classified into two types based on the issuing party, namely corporate bonds and government bonds (more commonly known as Treasury bonds).

In the Philippines, majority of the bond trading transactions are processed in the Philippine Dealing and Exchange Corporation (PDEX), the local exchange of the bond market, through its PDEX platform. The PDEX platform also covers Treasury bill transactions. Treasury bill, or simply T-bill, is an obligation of the national government to be repaid in a year or less. T-bills do not bear interest and are sold at discount with its full face value redeemable at maturity. Maturities for the security are 91-, 182-, and 364-days.

Investments in Treasury bonds and bills are considered risk-free since these securities are guaranteed by the issuing government. The issuing government will not default on its debt obligations as it may employ various means to generate cash to pay back the issued instrument.

Foreign Currency

Trading currencies in the Foreign Exchange Market (FOREX), involves the purchase of one currency for a different currency. Considered as the most liquid market in the world, the FOREX market determines the relative value of currency and assists in international trade and investment. Though largely composed of speculative traders, market participants in the FOREX market include governments, central banks, financial institutions, and individuals.

In the Philippines, the Bangko Sentral ng Pilipinas (BSP) maintains a floating exchange rate, wherein the forces of supply and demand determine the prevalent exchange rate in the market. Philippine banks engage in spot, outright forward, and swap transactions for the peso-dollar or other third currency supported by the BSP. At present, the Philippine Dealing System provides the platform, PDEX, for the peso-dollar trading between member banks of the Bankers Association of the Philippines and the BSP, while Reuters Dealing and Bloomberg Financial Services are used for third currency trading.

Time Deposit

Time Deposit refers to a savings account or a certificate of deposit offered by banks which pays a fixed interest rate until a specified maturity date. Funds from a time deposit are held by the bank for a fixed period and carry with it a specified interest rate. Time deposits are relatively more liquid compared to other securities. However, it may not be withdrawn prior to its maturity date unless the depositor is willing to pay for fees/penalties corresponding with early termination.

Commodities

Commodities are raw materials used in the production of goods or services being provided to consumers. Commodities include agricultural products, metals, and energy products. Commodities are traded in the commodity exchanges through spot, futures and options contracts.

Derivatives

Derivatives are securities which derive their values from underlying assets. Considered as hedging instruments against high risk investments, derivatives are contracts between two or more parties priced by the fluctuations in the underlying assets. The most common underlying assets for derivatives are stocks, bonds, commodities, currencies, interest rates, and market indices. Derivatives are traded through futures contracts, options, and swaps. At present, derivatives are not traded in the Philippines.

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