Understanding FMETF

In my post The Ultimate Guide to Philippine Index Funds, I concluded that among the available index funds in the Philippines, the best option when all things considered is the First Metro Exchange Traded Funded or FMETF. Based on your enthusiastic responses, beautiful readers, you need more information in order to understand FMETF in detail. I heard you. In this post, I will answer your questions (and even the questions you didn’t think to ask) about FMETF.

 

Before we proceed, I would like to clarify that this post is not sponsored by First Metro Asset Management Inc. to promote FMETF. I’m writing this because I truly think that based on my criteria, FMETF is the best option for the regular Filipino investor.

 

But hey, FAMI, if you ever want to pay me for writing a post about your product, feel free to do so. Auntie Katie needs to earn those coins.

What is FMETF?

First, the basics.

 

FMETF stands for First Metro Philippine Equity Exchange Traded Fund. It was launched in January 15, 2013 by the First Metro Investment Corporation (FMIC), a subsidiary of the Metrobank Group. The First Metro Asset Management, Inc. is its fund manager and principal distributor.

 

It’s an index fund. This means the goal of FMETF is to track and match the Philippine Stock Exchange Index or PSEi. It’s not striving to out-earn the PSEi but to match its movement. FMETF’s fund managers strive to copy the composition of the PSEi as closely as possible to reduce their tracking error. So far, FMETF’s tracking error is at an impressive .04%

Tracking error is the gap or deviation between the returns of the fund compared to the returns of the index. In general, index funds underperform compared to their benchmarks.

If you’re looking to “beat the market,” putting your money in FMETF is not the right move for you.

FMETF is the only exchange traded fund or ETF in the Philippine market today. It is an ETF that is also an index fund.

Other index funds in the Philippines are either a mutual fund (managed by an investment company) or a UITF (managed by a bank).

Because it’s an ETF, FMETF’s key difference from mutual funds and UITFs is that it works like a common stock. This means instead of going to a bank or an investment company to buy shares, you can use your online trading account to buy FMETF shares.

Now that we have the basics out of the way, let’s dig a little bit deeper.

What are FMETF's underlying assets?

FMETF tracks the PSEi. So whatever common stocks are in the PSEi and their respective weights should also be reflected in FMETF as much as possible.

FMETF assets
FMETF assets 2

If you notice on the pictures, there are some differences between the composition of PSEi and FMETF. Of course, an index fund cannot match the composition of an index 100 percent because a fund has to keep a certain amount of their assets in cash for operations and administrative expenses, as well as taxes.

 

All index funds, including FMETF, should rebalance their holdings regularly. FMETF rebalances its holdings every six (6) months.

 

QUESTION: Can FMETF buy holdings other than the PSEi components and/or other investment instruments (bonds, money market funds, etc.) so that it can beat the market?

No. The governing rules and regulations of the SEC do not allow changing the investment objectives of the fund without the prior approval of the majority of its shareholders.

How can I make money with FMETF?

Like any other common stock and investment instruments, to make money with FMETF, you buy low and sell high. You can do either of the following:

 

  1. Long-term investing. Buy FMETF shares, hold onto it for years, and sell at a higher price. This is recommended for those who want to fund long-term goals such as retirement.
  2. Day trading. Buy FMETF at a lower price, wait for fluctuations and movements in the market and sell it in a few hours or days. I personally do not recommend day trading unless you’re extremely skilled and have the time to personally monitor your holdings throughout the day. Plus, you would be liable for trading fees and taxes. For me, it’s just not worth it.
 

Another way to make money off FMETF is through dividends. So far, FMETF has only distributed stock dividends instead of cash dividends.  

 

This means that in addition to your current holdings, the company will give you additional shares (1) in proportion to your holdings as determined by the company and (2) if you were holding said shares on or before a predetermined date.

 

What happens is:

             Current FMETF holdings + dividend shares = Your total FMETF shares

 

Now, there are many debates about whether or not stock dividends are better than cash dividends. You can read Investopedia’s take here.

Why should I choose FMETF over other index funds?

Why invest in FMETF instead of the other index funds in the market? In my guide to index funds (seriously, read it, it’s awesome!) I mentioned several criteria that I use in choosing the best index funds in the market. I urge you to head over to that post, asap.

  • Low Management Fees. Out of all the index funds in the Philippines, FMETF has the lowest annual management fees at 0.5 percent. Most index funds in the Philippines charge around 1 percent in management fees (plus third-party fees) every year, which is 100 percent higher than what FMETF charges. Some of the really bad ones charge up to 2.5 percent annually.
 

Remember that these fees cut into your gains and are always due to be paid, even if the fund loses money. Since all index funds are tracking the same basket of  securities, I don’t see any reason why we should pay higher fees. 

 

Index funds have 1 job: match the index. No additional analyses, modeling, etc. is needed from them.

 

Take note that other than the management fees, other fees are due to be paid from the funds as well, these fees include:

 

  1. Custodian Fees
  2. External auditor and legal fees
  3. Other fees (maintenance of website, etc.)
  4. VAT
 
  • Low Tracking Error. I mentioned earlier in the post that FMETF has a great record in terms of closely tracking the index at 0.04% tracking error.
 
  • Convenient to buy. This one is very important since many of my readers are working abroad and cannot visit the offices of investment companies and bank branches to subscribe to their index funds. With FMETF, as long as you have an online trading account, you can already buy shares.
 
  • Transparency. What I like about FMETF is that it’s very transparent. All the information that you need to make a wise investment decision are available in their website. Plus, it has been my experience that if clients have questions, they are very responsive. Contrast that with its competitors who are not very forthcoming with their information. I’m a skeptical person by nature so I automatically assume that if an institution is making it hard for investors to access information, it may be hiding something.

Are there any disadvantages in investing in FMETF?

Of course, investing always come with trade-offs. There is no perfect and risk-free investment instrument that will always yield high profits. So before you put your hard-earned money in FMETF, consider these following factors:

 

  1. You need to have a trading account to trade FMETF. I know, this seems like a no-brainer but many people don’t have a trading account, nor can be bothered to set up one. If you’re one of those people who can’t be bothered, then FMETF is not for you.
  2. You have no control over the companies that make up its underlying assets. Since FMETF is anchored on the PSEi and its component assets, you have no control over where your money goes.
  3. There may be some concerns on liquidity. Those who want to buy and sell FMETF in large volumes are concerned that there may not be enough people transacting this stock. A concern if you want to do day trading.
  4. You’re investing in the Philippines. The Philippine capital markets is volatile. Remember that time when we’re one of the first 2 stock markets in the world that closed due to COVID while others remained open? Investors in the Philippines can lose their mind pretty fast. You might want to consider this fact before putting all or most of your retirement money in FMETF.

 

That being said, I think if you want to (or can only) invest in the Philippines, buying FMETF shares is an excellent long-term choice.

Okay, I'm sold. How do I buy and sell FMETF?

I know people are still confused about how to buy FMETF so there is a need for a walk through. 

 

First, before you can invest in FMETF, you need to have your own brokerage account, preferably an online one. Some of the most popular ones are COL Financial, BPI Trade, and BDO Nomura. I personally tried and liked First Metro Sec Pro, which I reviewed here.

 

Can you invest in FMETF without a broker/brokerage account? No. Just take the time and effort to open an account. 

 

Second, the moment your online brokerage account is set up, you need to fund it. Most brokerages allow money transfers or payments online. 

 

Third, wait for the system to reflect your funds. Once the money is there, you’re ready to go.  

 

Fourth, go to the “trading” or “order” tab or its equivalent in your interface. To locate the target stock, type: 

Ticker symbol/stock code: FMETF

Type FMETF in the box
Getting FMETF quotes
Data as of July 17, 2020

Fifth, based on the information pulled up, enter your bid price and the number of shares you want to buy. Your bid price should be within a reasonable range from the bid price displayed. Otherwise, the system will not allow your purchase through. 

 

For example, you think you’ll be clever and put in say, Php50 when the current bid price is Php92. Don’t do that. 

 

 

As for the quantity, most online brokerages will show you how much the total transaction amount would be. So you can adjust accordingly based on how much money you have available. 

 

Sixth, follow the prompts that will appear. Then press “send” or “order” or whatever is its equivalent in your interface.

 

It’s that simple. No need to panic or procrastinate thinking that buying and selling FMETF is hard. You can learn it in a few minutes. 

QUESTION: What is the minimum number of FMETF shares I can buy?

The buying and selling of shares are subject to PSE board lot, that is, the minimum number of shares based on the stock price. For FMETF, the minimum number of shares that can be bought and sold are 10.

FMETF info from PSE
Minimum board lot highlighted

What are the fees associated with FMETF transactions?

Just like when buying other common shares, investors in the secondary market – that is, regular folks like you and me who buy FMETF through the stock exchange – are liable to pay the following fees:

FEES FOR THE “BUY” SIDE

Broker’s Commission

Php 20 or 0.25% per trade, whichever is higher

VAT

12% of the broker’s commission or .0003% of the gross trade value

PSE transaction fee

0.005% of the gross trade value

SCCP fee

0.01% of the gross trade value

TOTAL

0.2653% of the gross trade value

FEES FOR THE “SELL” SIDE

Broker’s Commission

Php 20 or 0.25% per trade, whichever is higher

VAT

12% of the broker’s commission or .0003% of the gross selling price

PSE transaction fee

0.005% of the gross transaction

SCCP fee

0.01% of the gross trade value

Stock Transaction Tax

0.6% of the gross selling price

TOTAL

.8653% of the gross selling price

These fees will be automatically calculated by the system when you execute transactions through your brokerage account.

 

Things to keep in mind when transacting

FMETF’s Net Asset Value per share (NAVPS) is computed daily at the end of each trading day and can be found at the FMETF website.

 

However, intra-day (within the day) NAVPS is also calculated at 1-minute intervals during PSE trading hours and are disclosed throughout the FMETF and PSE websites.

 

Before you proceed to buy FMETF shares, I urge you to take a look at the NAVPS first.

 

Why do we need to check the NAVPS before buying FMETF shares?

 

Because FMEFT has more than 1 price: the NAVPS and the stock price, which is the price reflected by the market.

 

FMETF can sell either at a premium (trading above the NAVPS) or a discount (trading lower than the NAVPS) to its actual value. Because it’s sold in the stock market, the intra-day price may be higher or lower than the NAVPS, depending on many factors, including but not limited to investor sentiment, recent government announcements, etc.

 

Historically since its inception, the highest deviation of FMETF’s trading price from its NAVPS was 6.13% at premium in May 15, 2019.

FMETF price deviation

Personally, I think if you are a long-term investor, these deviations are a minor consideration unless they are abnormally high. You can always check the graph available at the FMETF website to check the historical data since inception before you buy shares.

 

 

If you have a different opinion about this, please share your thoughts in the comments.

 

When is the ideal time to buy FMETF shares?

In general, I believe in the saying that time in the market is more important than timing the market.

 

But of course, this comes with a caveat. Just like any other stock, it’s probably not the best idea to buy shares when the stock price is at its highest. Although the challenge is how do you figure out what is the highest price? We’re not gifted with foresight.

 

Many people, including myself, invest using cost averaging. At its simplest, cost averaging is buying shares at a regular basis, (mostly) regardless of the share price. This strategy also works for people who don’t have a lot of money to invest right away and are slowly building their holdings over time.

How much should I invest each time?

One of the most popular advice from the Phinvest subreddit and Phinvest moderator u/speqter ( ‘sup! ) is to invest at least Php8,000 in FMETF each trade to maximize the fees.

 

Since the brokerage fees charged for each transaction is at least Php20 or .25% of the gross per trade, it is best to invest at least Php8,000 because .25% of Php8,000 is Php20.

 

If you invest less than Php8,000, you would still be charged Php20, which is not very cost-efficient in the long-run.

QUESTION: I can only invest Php1000 monthly. Should I buy FMETF for Php1,000 every month?

 

Since you will be charged Php20 each time you trade, I suggest that you save your money until you have at least Php8,000. If you buy Php1,000 worth of shares, you will be paying Php20 each time. Php20 x 8 trades equals to Php160 in total fees. That’s just crazy.

Your burning questions - answered

Here are some of the most asked questions on FMETF that I received.

 

1. I’m a minor who wants to invest in FMETF but I can’t have a trading account yet. What should I do?

 

Have your parents open an in-trust-for (ITF) brokerage account. It only requires your birth certificate and your parent’s documents/information.  There is no difference in functionality between a regular account and an ITF account.

 

You should have full rights to it once you become of age.

 

2. I don’t have a TIN (tax identification number) so I can’t open a trading account to buy FMETF. What should I do?

 

There is no way for you to open a trading account and trade stocks without a TIN unless you are a minor (see above). When performing business activities, taxes are always due. The government always takes its cut. There is no exception. ITF accounts use the parent’s TIN.

There are many guides online that will teach you to apply for a TIN even if you’re unemployed or are still a student. Google is your dear friend.

 

3. How long should I hold FMETF?

 

I think that FMETF is best suited for long-term investing, at the very least 5-7 years and onwards.

 

4. I’m a Filipino based overseas. Can I invest in FMETF?

 

Yes. Just open an online trading account and you should be good to go. Taxes will be automatically withheld by your brokerage account so there’s no need for you to file a separate tax form.

 

5. How is the management fee collected?

 

The management fee is computed based on the total value of the fund. It is collected monthly until the entire .5% is paid for the fiscal year.

 

The management fee always needs to be paid, even when the fund loses money. That’s why it’s imperative that you choose index funds that have the lowest fees. These companies are always getting paid, even if investors lose money for the year. They are not running a charity.

Final thoughts

If you’re thinking about setting aside money for the long-term, including for your kid’s college funds or to fund your retirement, putting your money in FMETF will be one of your best options.

 

As always, don’t just take my word. Study what I said and learn for yourself to determined whether or not investing in FMETF fits your goals and risk profile. And don’t be ashamed to ask. It’s better to ask before you invest than after, when the money already left your hands. 

 

Also, take care to remember that past performance does not guarantee future results. Historical data can be a basis for your decisions but there is no guarantee that the pattern will hold true in the future.

 

I hope you learned something from this post. If you have comments, questions, or you just want to share your investing experiences with FMETF, please write them in the comments below.

love Katie Scarlett
Understanding FMETF

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6 Responses

  1. Happy to have stumbled upon this blog (thanks to reddit/phinvest! I’ve been taking the necessary steps to improve my finances + financial literacy. I’m still a noob but I’m reading as much as I can. It’s great finding articles that explain things in the simplest manner.

    The noob in me has a question though, because I got lost on the 5th step – after you’ve explained about checking the NAVPS prior to bidding, does that mean that I can bid a little lower than the NAVPS, up to the bid price… or ask price?? Sorry I got confused on this part; I’ve yet to familiarize myself with those indicators in the Quote chart. Once I fully understand these I’m just a few clicks away from buying! Any help would be very much appreciated 🙂

  2. Hello! Thank you so much for your valuable blog! I’m looking to diversify and this blog has certainly convinced me to look into FMETF. Would you consider it to be a good investment given the current COVID situation?

  3. Hi Katie,

    I just recently began investing in FMETF but I’m concerned with its liquidity since daily trades are only in the 100s. Oh well, I won’t be selling millions worth of FMETF stock anytime soon so it’s not really an issue for now.

    Thanks for this great post!

  4. Hi Katie,

    I’ve read the article and I just have one little question. Is there any advantage at all to other Index Funds compared to FMETF (assuming you’re taking a long-term position so holding/exit fees aren’t a concern)?

    Thank you!

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