One thing we can all agree on is that ETFs (Exchange Traded Funds) have evolved today from a niche investment option to become one of the most popular and widely discussed product innovations in the asset and wealth management industry.
The global ETF market has built up phenomenal momentum over the past five years. The Covid-19 pandemic has further reinforced and highlighted ETFs’ remarkable resilience and growth potential despite market uncertainties and volatilities in 2020 and 2021. ETFs have emerged from the crisis years stronger than ever; not surprisingly, the global ETF asset under management has almost tripled from USD 3.4 trillion in 2016 to over US$10 trillion in November 2021.
This remarkable development underscores the fact that individual and institutional investors are now investing in ETFs like never before and they’re becoming comfortable gobbling up ETF funds.
A good number of local investors are asking lately, “What is an ETF” An ETF is an exchange-traded fund. It’s a form of investment security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock in a given stock market. ETFs experience price changes throughout the day as they are bought and sold. It is also commonly referred sometimes as 2 in 1 investment vehicle which provides instant diversification and growth potential since its price moves as long as the market is open.
When you buy a share of ETF, you are owning a diversified investment portfolio. It is somehow reassuring that the First Metro Exchange Traded Fund (FMETF), the first and only ETF in the country, mirrors the Philippine Stock Exchange Index (PSEi). In a nutshell, PSEi is the most well-known index in the Philippines. It is a fixed basket of thirty (30) common stocks of top listed companies, carefully selected to represent the general movement of the local stock market. In other words, it is the benchmark measuring the performance of the Philippine economy.
We first wrote about ETF on May 20, 2013, when First Metro Corp. (FMIC), one of the country’s leading investment banks, was then planning to offer the first ETF in the Philippines. Today, FMIC’s First Metro Philippine Equity Exchange Traded Fund, the country’s first and only listed ETF at the Philippine Stock Exchange, has proven its safety and stability as an investment outlet. For faster inquiry, you can send an email to [email protected].
Investing in ETFs has numerous positives 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.
Since these are passively managed, ETFs can be bought and sold any time of the day using prevailing market prices whereas mutual funds can only be bought and sold using end-of-day net asset value (NAV).
Significantly, the global ETF growth of 22% over the last five years ending December 2020, combined with record inflows, new entrants, innovative products and distribution opportunities, have prompted market participants to project that ETF growth would be USD 20 trillion global ETF by 2026, representing a 17% consolidated annual growth rate (CAGR) over the next five years.
In the face of rising global financial headwinds such as worsening global inflation, tumbling foreign currencies, except the US dollars (not exactly good for the economies of emerging markets), Ukraine war, horrible climate changes, unclear central banks’ fiscal and monetary policies, rising interest rates, ETF notably has elbowed its way into the mindset of many investors, both individual and institutional, in the investment landscape.
While equity and fixed income products remain the ETF market’s largest segments, circumstances are changing that will open up a wealth of investment opportunities and customer choices within the ETF market.
Indeed, new entrants are coming into the market. In the face of this increased competition, it is important to find ways to differentiate your business through products, distribution and investor education. It’s therefore important to plan how to get ahead of the curve or at least keep pace. If you don’t, your competitors will. Admittedly, the most cautious tone normally prevails during tough times.
Remember this. In ETF, you don’t have to beat the index, you’re buying the index.
Atty. Abelardo “Billy” Cortez is former FINEX national president and chairman of FINEX Foundation, former co-chairman of the Phils. Capital Markets Development Council and currently member of FINEX Ethics Committee. He is presently board director and executive committee member of the International Association of Financial Executives Institutes (IAFEI). A former independent board director at First Metro Investment Banking Corp, he is currently independent board director at other First Metro companies such as First Metro Securities Brokerage, Corp, First Metro Exchange-Traded Fund (ETF), PBC Capital Investment Corporation and First Metro Save and Learn FOCCUS Dynamic Fund (Metrobank Group).