PSE is thinking of adding ETF in the stock market to add more options to investors and to stir some excitement in our gloomy market.
As ETFs are not yet available here in the Philippines, but you can still avail of this investment tool by opening an offshore account such as HSBC Offshore (http://www.offshore.hsbc.com/1/2/home)
This is my current interest — as an alternative investment tool since the PSE has remained sloppy for almost a year now. That’s why I’m trying to learn and read articles about ETFs as much as I can. Here in the Philippines, HSBC allows you to open an HSBC Premier Account so that you can avail of this investment tool (and they’ll assist you every step of the way) – but, a minimum investment of 4M (say that again!) may not be a feasible choice for my current investment appetite just yet. Though, offshore banks only ask for $5000 minimum or PHP250K, this may be an option I have yet to explore.
To know more about ETF, you can visit Yahoo Finance for great articles (http://finance.yahoo.com/etf/education)
Below are sample articles I lifted from that website.
Why Exchange Traded Funds?
by ETFZone staff
Exchange-Traded Funds, or ETFs, are index funds that trade just like stocks on major stock exchanges. Want to invest in the market quickly and cheaply? ETFs are the most practical vehicle. They help the investor focus on what is most important, choice of asset classes.
All the major stock indexes have ETFs based on them, including:
- Dow Jones Industrial Average
- Standard & Poor’s 500 Index
- Nasdaq Composite
There are ETFs for large US companies, small ones, real estate investment trusts, international stocks, bonds, and even gold. Pick an asset class that is publicly available and there is a good bet that it is represented by an ETF or will be soon.
ETFs differ fundamentally from traditional mutual funds, which do not trade midday. Traditional mutual funds take orders during Wall Street trading hours, but the transactions actually occur at the close of the market. The price they receive is the sum of the closing day prices of all the stocks contained in the fund. Not so for ETFs, which trade instantaneously all day long and allow an investor to lock in a price for the underlying stocks immediately.
ETFs are economical to buy and especially to maintain over the long-run, making them especially attractive for the typical buy-and-hold investor. Annual fees are as low as .09% of assets, which is breathtakingly low compared to the average mutual fund fees of 1.4%. Although investors must pay a brokerage transaction to purchase them, with discount brokers this becomes negligible with sizable trades. There are a few easy-to-avoid pitfalls to watch out for. Tax effects are also not to be ignored, and ETFs perform well after-tax. They can be margined, and options based on them allow for various defensive (or speculative) investing strategies.
Their safety as a securities instrument (considered separately from the safety of any particular asset class they might represent) is considered the same as stock certificates themselves. Internally, ETFs are far more complex entities than mutual funds. A fascinating combination of players, including brokers, money managers and market specialists combine to make them run smoothly. Legally, ETFs are a class of mutual fund as they fall under many of the same Securities Exchange Commission rules that traditional mutual funds do. But their different structure means that the SEC has imposed different requirements from traditional mutual funds in how they are bought and sold.
ETFs are index funds at heart, so investors are encouraged to study the philosophy of index investing which downplays stock picking in favor of buying the market. But unlike most traditional index funds, investors need not take a passive, buy-and-hold approach. ETFs are also becoming favorites of hedge funds and day traders who like to pull the trigger frequently. Both types of investors may coexist and in fact strengthen each other by lowering overall transaction costs.
Frequently Asked Questions about ETFs
by ETFZone staff
Q: Where and how do I buy them?
Buy them as you would any stock, at any brokerage firm.
Q: Why would I buy an ETF when I can get an index mutual fund without a broker?
You can certainly buy a mutual fund directly from a fund group at no “load” or sales charge. Annual management fees will typically be higher with a traditional mutual fund and you can only buy or sell at the closing price at the end of the day.
Q: Why would I try to match the market with an index fund when I can beat it with an outperforming mutual fund?
First of all, the question presupposes that a mutual fund that has outperformed a market in the past will continue to do so in the future. Numerous studies by unbiased university researchers have shown clearly that mutual funds with leading performance records are just as likely to underperform than outperform the market several years into the future. Many investors have concluded that they are better off not taking the risk and instead remain happy with guaranteed average market returns of an index fund. Second, actively managed funds inevitably have higher annual management fees and have a worse capital gains tax profile.
Q: Are there any Dow Jones Industrials or S & P 500 ETFs?
Yes, there are numerous funds that track these and other popular indexes. Remember that Dow Jones and Standard & Poor’s maintain their respective indexes, and that fund groups license the indexes so that more than one fund can end up tracking an index.
Q: Are ETFs guaranteed or insured?
There seems to be little risk of abuse of the ETF structure as an investment vehicle. In the US the Securities Exchange Commission thoroughly examines any application to create an ETF, and only large and closely watched firms are allowed in on the creation and redemption process of an ETF certificate. Finally, the same government agency (the Depository Trust Clearing Corporation) that ensures that individual stock certificates end up in the right investor’s hands after a trade also ensures the ETF certificates are assigned correctly in a trade. In a decade of trading billions of dollars worth of ETFs, to our knowledge no US investor has ever lost money from fraudulent ETFs.
The risk of the underlying asset is quite another matter. Each asset class must be examined separately, and risk profiles of assets may change over time. Stocks are clearly risky, and ones in technology or emerging markets particularly so. Long-term bonds and real estate are also risky in their own way. Short-term investment grade bonds, however, have generally proven quite safe.
Q: Are ETFs only for stocks?
By no means. Any class of asset that has a published index around it and is liquid can be made into an ETF. Bonds, real estate are available now, and and gold ETFs are due in late 2003.
Q: Are there international ETFs?
There are many, including regional funds such as European or Pacific Rim funds, as well as individual country funds in relatively well-developed economies. In each of these countries there is an established index of reasonably large and liquid stocks that allows this to happen. As developing nations stabilize their stock markets, they will no doubt adopt ETFs.
Q: Do any ETFs try to beat the market?
Eventually there should be actively managed ETFs, but operationally it is much more difficult to manage. Applications to the SEC for such funds have been made but to date have not been successful. The problem is that an ETF is easier to create and redeem when all players in the process know exactly what basket of stocks will go into it. By its very nature, an actively managed fund must be secretive, because to reveal to the world what a stock fund is buying at the moment exposes it to parasitical traders who can jump in first and resell the stock to the eager fund. Various schemes have been proposed to circumvent these and other problems.
Q: Can non-US citizens own them?
ETFs are available in most developed nations. In the US, anyone who can open a brokerage account and buy stocks will be able to buy ETFs.
Q: Is it possible ETFs are just a fad?
This is not likely. As of July 2003 ETF assets in the US topped $155 Billion and are still growing in double digits, far faster than traditional mutual funds.
Posted by artgamolo 
Posted by artgamolo 
Posted by artgamolo 
