By Billy Cortez
To begin with, the introduction of exchange-traded funds (ETFs) in 1993 in the US capital market provided ordinary investors with what we call a blend between a stock and a mutual fund that allowed small capitalized investors to participate at lesser cost in the investing business. ETFs immediately gained wider acceptance and popularity after initial investors had fully experienced the combined benefits of holding a bunch of blue chip stocks or quality bonds paying lower management fees. Here’s also another point, ETFs impose no penalties whenever you sell them without being burdened by a holding period rule before selling any.
Over the past ten years, the number of ETFs has increased from 725 to more than 4,800. During the same period, ETFs’ global assets have jumped by leaps and bounds from US$580 billion to well over US$3 trillion, a hefty growth any way you look at it.
Many local investors want to know “What exactly is an ETF?” An ETF is an exchange-traded fund, a form of an investment outlet that tracks an index, a commodity, or a basket of assets ( stocks or bonds, for instance ) that trades like a stock in the stock exchange.
FMIC’s “First Metro Philippine Equity Exchange-Traded Fund,” the country’s first and only listed ETF at the Philippine Stock Exchange, given the short period of three years since its launching, has proven its worth, safety, and stability as an investment instrument with a best 3-year rate of return at 13%, compounded annual growth rate. This local ETF was chosen as Asia’s Best Emerging Market ETF in 2015 by The Asset financial journal; another award was given in the same year to First Metro Investment Corporation as ASEAN’s Best ETF manager by the same financial magazine.
Investing in ETFs is easy. Like any listed stock, you can buy ETFs at any of the 134 PSE brokers. When you buy ETFs in the exchange, there is no minimum investment required. You’re only bound by the minimum board lot size which is prescribed by the PSE; minimum board lots depend on the price of the ETF shares. ETFs are bought and sold daily, through the exchange, anytime of the day using prevailing market prices, unlike that of mutual funds that can only be bought and sold using end-of-day net asset value (NAV).
Marco Montanari, regional head of passive asset management at Deutsche Asset Management in Hong Kong. was quoted as saying that “fixed-income ETFs will be one of the trends for the next few years.” He further added that demand is driven by global investors starving for yield and looking to diversify. Also according to him, Asian investors are increasingly keen on investing in local currency corporate debt.
Last year, according to Moody’s ( a leading global rating agency ), US investors pulled out US$340 billion from active fund managers in the US, while putting in US$540 billion into passive investment alternatives like ETFs. Moody’s specifically mentioned BlackRock (the world’s largest ETF provider), Vanguard, State Street, Dimensional Advisors and Invesco as the companies benefitting from this major and continuing shift to passive investment; these mentioned companies dominate the passive investment market in the US with more than three-quarters of assets under their fund management business. There’s no denying the reality of the explosive growth of ETFs. In fact, some financial groups are now taking up the approach that, “if you can’t beat them, join them,” particularly if you possess a known company brand and bigger customer base to make your ETF work. Pimco, Goldman Sachs Asset Management and Franklin Templeton are among the large US asset managers that recently launched their own index-tracking strategies in a frontal response, catch-up move to the competitive pressures in the industry. They’re now flexing their corporate muscles because they don’t want to pay the price of complacency.
The times feel right. The case for long-term optimism on the global economic front remains valid. Stocks and bonds have taken off to a good start during the current inflationary environment. Without significant economic headwinds, we’re tempted to declare the long lull is over. Why not commit to make your money go as far as possible?
Think about it. Take the time to do so. It’s well worth the effort and you’ll be glad you did.
Atty. Billy Cortez is an independent board director at First Metro Investment Corporation (Metrobank Group). He was former FINEX president and chairman of the Capital Markets Development Council.
The opinions expressed here are the views of the writer and do not necessarily reflect the views and opinions of FINEX.