Four years ago, I wrote a post recommending passive index funds over actively-managed funds. An index fund is simply a fund that replicates the components of a market index. Back then, my choice of equity index funds were Philippine Stock Index Fund, a mutual fund, and BPI Philippine Equity Index Fund, a unit investment trust fund (UITF). Both funds, managed by BPI subsidiaries, track the Philippine Stock Exchange Index (PSEi).
However, as I wrote in a recent post recapping my first four years of investing, I have since redeemed all my local mutual fund and UITF shares. One reason is because of their high fees — the aforementioned BPI funds have management fees of 1.5% per annum.
That figure may not seem exorbitant compared to other Philippine funds, whose annual fees go as high as 2.5% (!). But, considering that index funds are just run by computers simply programmed to mirror index performance (hence “passive”), it’s definitely too high.
I still invest in index funds, but only in the US, courtesy of my husband who’s from there. Due to vast competition, many US index funds have famously low fees — one of our picks, the Schwab Total Stock Market Index Fund, has a rock-bottom expense ratio of only 0.03% (!) per annum. This means more of our hard-earned money is invested in the fund instead of lining the pockets of fund managers, resulting in higher returns in the long run.
I realize not everyone has an easy way to invest directly in the US stock market, so I took a second look at the Philippine scene. It’s good to see that more index funds tracking the PSEi have cropped up since I first wrote about them in January 2013 (at that time, there were only three). Still, only the following funds have annual fees below 1%:
- EastWest PSEi Tracker Fund. A UITF managed by EastWest Bank with a management fee of 0.75% per annum
- UCPB Philippine Index Equity Fund (UPIEF). A UITF managed by United Coconut Planters Bank, also with a management fee of 0.75% per annum
You can invest in the above funds by visiting their banks’ respective branches. Both UITFs charge early redemption fees, which shouldn’t be a concern for long-term investors. Both also charge custodian and external auditor fees (some banks incorporate these into the management fee while others don’t).
- First Metro Philippine Equity Exchange Traded Fund (FMETF). The country’s first and only exchange-traded fund (ETF), managed by First Metro Asset Management, with a management fee of 0.50% per annum
You can buy shares of FMETF through a brokerage firm. I hesitate to include FMETF because it’s not very transparent with its fees; one has to dig through its latest Annual Report for the figures. I’m too lazy to do the math, but FMETF has a bunch of hidden fees — custodian and transfer agency fees, directors’ and officers’ fees, etc etc. In addition, since an ETF is traded like a stock, you have to pay commission — which depends on your choice of stockbroker — and other transaction fees every time you buy or sell its shares. Click here for a breakdown of these fees.
For all three funds, the Net Asset Value per Unit (NAVpU) is already net of management fees. For the UITFs, the NAVpU is also already net of the 20% withholding tax on gains.
As you can see from the graph above, the three funds closely mirror the PSEi. Sadly, fees are not likely to go super-low anytime soon due to lack of competition. It doesn’t help that stock market penetration in the Philippines is quite poor, with less than 1% of the population investing in it. Still, while 0.50% and 0.75% are far from rock-bottom and pales in comparison to 0.03%, it’s a start.