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Challenges hound awaited launch of ETFs in PH

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The upcoming launch of Exchange Traded Funds, or ETFs, could provide some respite for seekers of alternative investment vehicles. ILLUSTRATION FROM ETFDB.COM

MANILA, Philippines—Recent years have been difficult for new equity products coming out of the Philippines despite the wider prominence it has gained in international investment circles, but the upcoming launch of Exchange Traded Funds, or ETFs, could provide some respite for seekers of alternative investment vehicles.

ETFs are similar to mutual funds in that they track or benchmark against a basket of assets like the Philippine Stock Exchange index.

But unlike a mutual fund, ETFs are traded on a stock exchange, which means prices are quoted real time so investors looking to buy these know at any given time what their investment is worth. Moreover, ETFs are passively managed, which is good for retail investors, especially those investing for the first time, as costs are lower compared to actively-managed funds.

The introduction of ETFs comes at a time when investors are looking for new Philippine investment instruments on expectations that the stock market will continue to provide returns given the country’s stable economic prospects and as the system remains awash in cash.

Other efforts to launch products, like the Real Estate Investment Trust, were implemented but only after fiscal authorities added controversial tax measures. The result: No REIT offer has been launched to date.

Investment experts interviewed by the Inquirer, however, pointed out that ETFs also face constraints: the difficulty for large foreign funds to invest, given the relatively small size of the Philippine stock market, being a chief concern. Some investment bankers, which were initially interested in conducting ETF offers, are also unsure whether launching an ETF makes financial sense at this time.

Nonetheless, these experts agreed that new products like ETFs were essential to growing and developing the domestic capital market.

“This is a good time to introduce ETFs when there are a lot of investment funds seeking alternatives,” Eduardo Banaag, Philam Life’s head of equity fund management, said in an interview.

He noted that ETFs would also help drive up gains in the PSE index. He said it was typical for fund managers to invest large amounts of the fund in an index as a way to benchmark their performance.

The PSEi has been volatile over the last 60 days, during which year-to-date record gains of more than a quarter to 7,400 on May 15 were wiped out.

The PSEi has clawed back some of those gains to trade at the current 6,600-level and Philam Life said this could move to 6,750 by the end of the year before moving to about 7,500 in 2014.

Those targets, among the more conservative of projections, indicated that there was still room for growth, even for passively-managed funds like ETFs.

“ETFs will add depth to our market. This can be seen in developed markets already,” said stock broker and Philequity Management director Wilson Sy.

The SEC last month approved the implementing rules for ETFs, and a handful of firms have already applied with an eye toward launching the instrument this year or in 2014.

The first would likely be an ETF offer by First Metro Investment Corp., the investment banking unit of the Ty family’s Metropolitan Bank and Trust Co. First Metro president Roberto Juanchito Dispo said the company’s ETF could be launched by the first week of September.

Not all groups, however, are convinced that this is the right time for an ETF launch.

Another large investment bank, BDO Capital and Investment Corp., had planned on pursuing an ETF offer this year but was now reevaluating this plan due to structural issues that still need to be addressed.

One of these is the relatively small size of the Philippine equity market, which makes it difficult for large investors to enter and exit easily, noted Banaag.

To address costs, the PSE said that transaction fees charged by the exchange would be waived for market makers, or the stock broker assigned to facilitate trading by holding certain shares of a target security.

Meeting the challenge of bolstering liquidity, which is also linked to encouraging more firms to go public, could take longer to address, analysts said.


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