ETF, Index Fund and PERA: Best Investment for Retirement Philippines
According to this January 2017 news report, over 41 percent of older millennials, aged 24 to 35, predicted that they won’t be “financially secure enough to retire until they are older than 65,”
This survey result is heartbreaking.
As someone who has immense passion in improving other’s finances, I know for a fact that 24 to 35 is the best age to prepare yourself for retirement.
The most active phase you could ever be, age 24 to 35, is when you could afford to take as many job and side hustles as you want.
From here you have no choice but to get serious with your plans and goals in life for you are not getting young anymore!
I started planning for retirement at 19. And now at 24, I am still far from the ideal financial independence and early retirement I dream about.
But, because I started young I know for a fact that I had within me the power of compounding.
Compounding is too powerful that someone who started saving at age 25 will end up having double the amount of someone who started saving later at age 35 even if they both save Php 1000 a month.
Here’s the truth:
Investing for your retirement during the early years of your career is one of the best money moves you can ever do for your(future)self.
And so today I will tour you on three of the best retirement fund you should know of — ETF, Index Fund and PERA.
I have two major goals in creating this thorough post:
1. To encourage those who are not yet saving and investing to make their first investment for retirement.
2. To educate you on where to best diversify your retirement portfolio.
Why You Should Invest for Your Retirement Now?
One afternoon I told my parents I’m investing in mutual fund. It was 2014, I got fired from a content writer job and used the last salary I received to open an account.
I told them I’m starting a retirement fund.
Both my Mama and Papa got surprised. At 20, I am thinking about my retirement already.
Retirement, like debt, is a topic I have never really gotten too deep here in SavingsPinay. I don’t feel as confident compared to others who are doing such great job on their journey.
But now I realize how important it is to invest for your retirement at an early age.
There are three things we can never avoid in our Earthly life.
1. The risk of getting sick
2. The risk of living too long
3. The risk of dying young
Let me ask you, how financially prepared are you if you or someone from your family got seriously ill? Who would take care of you when you get old? Does your family (or your future family) ready in case you will die today?
I know how scary the questions are but these essential truths are the reason why we should think about our financial future more.
ETF, Index Fund and PERA: Best Investment for Retirement Philippines
I like to call ETFs, Index Funds and PERA as retirement accounts or retirement funds, collectively.
How does a retirement fund work?
Retirement funds are basically money dedicated to finance your retirement years.
Although you have the option to save for retirement using a regular savings account, investing in a retirement account or fund speeds up everything.
Because your money is being invested, you are taking advantage of the power of compound interest.
Thus, to retire with Php 4 million pesos with a monthly income of Php 25,000 becomes more possible with investing. This, my friend, is already proven and tested.
But which Retirement Fund is right for you?
I chose ETF, Index Fund and PERA to be the focus of today’s discussion because I see them as vehicles one could invest with without too much money involved.
Owning a rental property is a good investment (probably the best) for retirement but the reality is not everyone can afford to buy one in their 20s or even 30s.
ETF, Index Fund and PERA as retirement accounts give you the following benefits:
- You can open an account and start investing today!
- Start as low as Php 5,000 to Php 25,000 investment.
- Someone will manage your money for you.
Investing in Exchange Trade Fund or ETF
To better explain what investing in ETF looks like, let’s redefine first what mutual fund is.
A mutual fund, as we learned in this previous post, is a pool of money managed by a professional fund manager and invested in a specific type of securities to answer an investor’s financial goal in life.
When you invest in mutual fund you are basically entrusting your money to an entity.
- You can’t choose which stocks your money will be invested.
- You don’t need to worry of the whole buying and selling procedure.
It is the simplest and easiest way you can invest in stocks. You can treat it like a normal savings account but instead of parking your money in the bank, your investments will be put at work.
Save and Learn Equity Fund is an example of a mutual fund.
Now, Exchange Traded Funds or ETFs is just like a normal mutual fund. You are investing in a bucket of stocks BUT, it can be bought and sold like a common stock in the Philippine stock market.
Example of ETF:
First Metro Exchange Trade Fund, the first and only ETF in the Philippines to date.
How ETF Works
ETF works in a rather simple way. Like mutual fund, when you own a share of ETF, you are owning a rather diversified investment portfolio.
FMETF currently invests in the following top stocks.
What makes ETF different is that it can be bought and sold like a regular stock.
ETF has its own stock code (FMETF) and unlike mutual fund, you can see ETF in the list of stocks in the Philippine Stock Market.
Another major difference is that an ETF tracks a specific index not necessarily created to match your goal unlike mutual funds.
How to Invest in ETF
There are two ways you can invest in ETF in the Philippines, (1) Through opening a brokerage account and (2) Through account creation.
Through Brokerage Account
Step 1. Open a brokerage account
Since ETF is a stock you can buy in the Philippine stock market, you need to open your own brokerage account to start investing.
You can choose from the top brokerage firms in the country today such as COL Financial, BPI Trade, and First Metro Securities among others.
If this is your first time to open a brokerage account I encourage you to visit Smart Pinoy Investor’s How To Choose Your Broker post.
Here’s a step-by-step guide on how I opened my account with First Metro Securities, the investment firm of Metrobank.
Step 2. Buy your first shares of ETF
In my Stocks for Pinoys 5-Day Free Email Course I gave a walk through on how to buy your firsts share of a particular stock.
ETF, as of this writing trades at Php 130.50 per share. Looking at the board lot, the minimum shares you need to buy will be 10. At this rate you need more or less Php 1400 to own at least 10 shares of FMETF including fees.
Step 3. Keep adding to your FMETF investment
Because FMETF works just like a mutual fund you can apply Peso-Cost Averaging Method throughout your investment for retirement.
You can start with buying 10 shares per cut-off which gives you 240 shares owned at the end of the year.
Once you have a big bonus or commission coming, always fund your account automatically. Sooner or later you will realize that the returns from your FMETF investment is enough to fund your retirement!
Through Account Creation or Bulk Order
Account Creation or Bulk Order is recommended for those who are enough money to buy at least 10,000 ETF shares. To proceed with this option, please see below steps:
Step 1. Visit to http://www.firstmetroetf.com.ph
As mentioned, First Metro ETF or FMETF is the only Exchange Traded Fund available in the Philippines. BPI and BDO have shown interest in launching their own ETF to the public in the future.
Step 2. Download and Fill-Up the Order Form
The latest Order Form available in the FMETF website is this: http://www.firstmetroetf.com.ph/downloads/ETF%20-%20Order%20Application%20Form%20Dec2013.pdf
You can download the form and fill-up the necessary fields.
- Order Application Form should be received before 11:30 AM of the respective business day.
- Form must be faxed to First Metro Asset Management, Inc. at (632) 816-0467
- Creation is available for a minimum of 10,000 shares.
For inquiries you may reach call this number: (632) 891-2860 to 65.
Why ETF is the Best Investment for Retirement?
There are five reasons why ETFs are considered as best investment for retirement.
1. Passive Investment
Unlike mutual fund which is actively managed by a fund manager, investing in ETFs offer passive investment.
What do you mean by passive, Izza?
FMETF is created to mimic or track the market aka PSEi which consists the 30 “biggest” publicly listed companies in the Philippines based on PSE’s standard.
The movement of PSEi is closely monitored by investors, fund managers, economists and everyone who are into investing in stocks because it indicates how good the Philippine economy is.
If PSEi is up then it is a good indicator that the general economy of the country is doing well. Thus, it is the best time to invest.
The components of PSEi are already the top of the top, companies that best represent how good the Philippine economy is. If you invest in FMETF you are simply following the wave.
No fund manager is involved to make decisions which securities to buy or sell. It simply tries to replicate or get as close as possible to the index.
If you look at the table below you’ll see how FMETF’s performance last year manage to beat the PSEi.
[table id=6 /]
For example, if you were able to buy 1000 shares of FMETF at Php 125 per share in January 2017 for Php 125,000.
Based on the Year-to-Date Return, your Php 125,000 investment is Php 156,250 today! That is without you even doing anything.
2. More Affordable than Mutual Fund
Because mutual funds are actively managed, there are certain fees involved every time you transact. This is where ETFs are mostly at great advantage, management fees are waived. A program in computer runs your investment, eliminating human error so you are at peace that your retirement fund is in good hands.
Asset allocation is an important part of every investment. You want to maximize where your money can go.
The good thing about investing in ETF is that you’re already owning shares from companies included in the PSEi!
The Top 30 companies are:
- Aboitiz Equity Ventures, Inc. (Holding Firms)
- Aboitiz Power Corp. (Energy & Utilities)
- Alliance Global Group, Inc. (Holding Firms)
- Ayala Corporation (Holding Firms)
- Ayala Land, Inc. (Real Estate)
- Bank of the Philippine Islands (Finance)
- BDO Unibank, Inc. (Finance)
- Bloomberry Resorts Corporation (Tourism & Leisure)
- DMCI Holdings, Inc. (Holding Firms)
- Emperador Inc. (Food & Beverages)
- Energy Development Corporation (Energy & Utilities)
- First Gen Corporation (Energy & Utilities)
- Globe Telecom, Inc. (Telecommunications)
- GT Capital Holdings, Inc. (Holding Firms)
- International Container Terminal Services, Inc. (Transportation & Logistics)
- JG Summit Holdings, Inc. (Holding Firms)
- Jollibee Foods Corporation (Food & Beverages)
- LT Group, Inc. (Holding Firms)
- Manila Electric Company (Energy & Utilities)
- Megaworld Corporation (Real Estate)
- Metro Pacific Investments Corporation (Holding Firms)
- Metropolitan Bank & Trust Company (Finance)
- Petron Corporation (Energy & Utilities)
- Philippine Long Distance Telephone Company (Telecommunications)
- Robinsons Land Corporation (Real Estate)
- San Miguel Corporation (Food & Beverages)
- SM Investments Corporation (Holding Firms)
- SM Prime Holdings, Inc. (Real Estate)
- Semirara Mining And Power Corporation (Mining / Energy & Utilities)
- Universal Robina Corporation (Food & Beverages)
Your money is allocated wisely to shares from companies that will still exist 30 to 50 years from now! Exceeding your retirement age!
Investing in Index Fund
Mutual funds are managed and run by portfolio managers. Your money is being invested in stocks that researched and selected to attain the best returns for your investment.
Investing in index fund is a tad bit different though. Your money is passively managed and run by a program to match the performance of a given index.
Now that sounds like an ETF, Izza!!!
But unlike Exchange Traded Funds, Index Funds are not traded like a stock.
Index Funds are simply mutual funds that mirrors a given market, commonly the PSEi.
How Index Fund works?
Index Funds work like mutual fund. When you start investing in one, your money will be pooled together with the other investors and invested on a common market.
The Philippine Stock Exchange Index a.k.a. the Top 30 companies in the country is the number one market that index fund in the Philippines mimics.
Last quarter of 2017, FAMI launched a Consumer Index Fund. The First Metro Index is composed of 18 stocks under food and beverage manufacturing, fast food and restaurants, mall development, communications, financial services, tourism, transportation and more.
How to Invest in Index Fund
Index Funds are sold by top asset management firms in the country. Opening an account is the same as opening a mutual fund.
Depending on the financial company you will entrust your investments with, you will may need to do/to present the following:
Step 1. Visit the website of your chosen account provider.
Step 2. On their website you can easily find the page for Index Fund and/or Investment Products.
Step 3. Read the differences of each Index Fund offerings. Select your fund based on your personal investment objectives, investment horizon and your risk profile. READ: Reader Question | Where Should I Invest My Money?
Step 4. Download the needed forms. This will depend on your chosen asset management company.
- Prospectus which is required and filed with the Securities and Exchange Commission. This document provides details about an investment offering as well as facts that an investor need to make an investment decision.
- Account Opening Form which is required to be filled up for your information and other personal reference.
- Investment Risk Profiling Questionnaire which will know your investment risk profiles and match you with the right companies to invest with.
Step 5. Prepare your IDs.
Step 6. Have you initial investment ready. Initial investment for an Index Fund account ranges from 5,000pesos to 10,000pesos. Additional investment is minimum of 1,000pesos
Step 7. Submit all your requirements. You may need to go to the nearest office or send through mail. Sun Life for example introduces an online facility that allows you to add, transfer and redeem shares anytime, anywhere. On FAMI I opened my account by submitting all the forms and requirements via courier.
Step 8. Wait for your proof of purchase and/or statement of account to arrive.
Step 9. Fund your account.
Why Invest in Index Fund for Retirement?
According to Sir Warren Buffet, index fund is the best investment for retirement. Why did he say so?
Just like mutual fund and ETF, Index Funds are invested in a market that already have multiple stocks.
Direct investing in the stock market can be a bloody and stressful journey. You have to spend time researching which stocks to buy and when to buy them.
In Index Fund all you have to do is simply invest. It streamlines the time (and emotion) spent making decision to where your money should go.
Investing in index fund has a clear goal in mind – mirror the market!
What does this mean for you and your retirement fund?
As long as your chosen market is green, your index fund is green too.
Something I realized now that I’m investing in direct stock market is that I have a tendency to be emotionally attached.
As the market move up and down, I am easily consumed by fear and greed. This feeling force me to make sudden financial decisions here and there.
With Index Fund, there is a lesser chance that you get affected by your emotion. Index Fund has a simple job – track the market!
Investing in PERA
Personal Equity Retirement Account or PERA is the most recent retirement account made available in the Philippines.
It is a personal and voluntary retirement savings plan where you can contribute as long as you have a TIN Number.
PERA is created to encourage Filipinos to invest for their retirement. It took 8 long years for PERA to be implemented in the country.
Today, well-known banks such as BDO and BPI are now accepting contributions.
How PERA works?
To understand how Personal Equity Retirement Account works, you need to imagine SSS or other government-mandated contributions.
In SSS the contributions you make are used to fund government projects. In return to your investments, SSS provides you with financial benefits like:
- Salary Loan
- Paid Maternity Leave for Women
- Retirement Pension
The amount of pension you’ll get with your SSS or GSIS contributions is only 4,000 pesos at most.
With PERA, your contributions are invested in, wait for it,
A MUTUAL FUND.
By the time you reach your retirement age (55) the money earned through the said investments will be given to you as a retirement benefit free of tax.
You get to avail your retirement benefit in lump-sum or single payment, regular pensions like SSS or a combination of both.
But here’s the trick:
To encourage every Juan to prepare for their retirement years, early withdrawal of your PERA assets will be penalized.
If you withdraw your investment before reaching 55 your 5% tax credit will be waived and you will pay a flat rate of twenty percent (20%) tax based on the total income earned by your PERA account from the time of opening to the time of early withdrawal.
Of course there are exceptions to the rule. If you reason for early withdrawal is reasonable like illness or accident in excess of 30 days, permanent total disability and/or you just want to switch to a new PERA Distributor, you won’t get punished.
How to Invest in PERA?
Applying for a Personal Equity and Retirement Account (P.E.R.A.) in the Philippines is very easy.
The first thing you need to do is choose an administrator. An administrator acts as your chosen entity to manage and invest your contributions.
Two of the well-known accredited administrators of PERA are BPI and BDO.
Requirements and procedures will differ depending on your chosen administrator but just like any other investment account opening you will need to prepare the following:
1. Duly Accomplished Application Form – You can visit BPI or BDO website to download the account opening form.
Client Sustainability Assessment (CSA) – This is to identify your investment objectives and risk tolerance.
Risk Disclosure Statement – This contains provisions on the general risks associated with your PERA investment.
2. Valid government ID – You can refer to the List of Acceptable IDs to bring supporting documents to prove your identity.
3. TIN ID – You can also use a copy of your Income Tax Return or any other valid document that can support your TIN.
4.Initial money you will invest.
Why Invest in PERA for Retirement?
1. TAX Credit
You have a 5% tax credit on your annual PERA contributions every year. You can use this tax credit against your tax liabilities.
Say for example your income tax turned out to be 120,000 pesos, but your total annual contribution to your PERA account is 100,000 pesos, you have 5,000 pesos credit to use. You income tax will be 115,000 pesos only instead.
2. TAX Exempt on Your Earnings
As mentioned the best advantage of investing in a Personal Equity and Retirement Account is that your contributions is being invested to a dedicated investment vehicle with higher potential of growing.
Now unlike normal UITF or Mutual Fund account, the money earned through your investments a.k.a. your PERA assets is exempted from taxes.
Whatever amount you earn as you reach your retirement age will be yours tax free!
- No final withholding tax on interest
- No capital gains tax on sale, exchange, retirement or maturity of bonds.
- No 10% tax on cash and/or dividends.
- No regular income tax
3. PERA also acts as your estate tool
In case of death your PERA assets will be paid out to your beneficiaries without estate tax and question at all. It will be paid out without much hassle than a regular investment.
ETF vs. Index Fund vs. PERA | Which is the best retirement investment for you?
Just like what I did in my best alternative investment guide, I will compare each retirement accounts based on some criteria. For ETF, Index Fund and PERA I will compare on the following metrics:
Return of Investment
ETF, Index Fund and PERA provides the benefit of diversification. This is good and important factor especially if you are investing for a long time or for your retirement age.
With ETF and Index Fund you get a portfolio that mirrors the Philippine Stock Exchange Index already. In the Philippines, there’s no other market worth mimicking than the PSEi.
Although PERA only invests on normal type of mutual funds like equity, balanced and money market, it gives the most retirement-ready advantage out of the three retirement accounts.
Kumbaga created talaga for retirement si PERA.
Whatever amount you earn as you reach your retirement age will be yours tax free!
In case of untimely death your PERA assets will be paid out to your beneficiaries without estate tax and question at all.
Of course we need to talk about performance.
I’d like to emphasize that just like mutual funds, past performance of ETF, Index Fund and PERA is no guarantee of future results.
This is further discussed in my best mutual fund in the Philippines for 2018 post.
ETF’s performance since its inception is just A-MAZ-ING. Because it is treated like a stock, its net asset value increases exponentially.
Index Fund, on the other hand, gives consistent performance. Because it just tracks the market, there are no outside factors that could affect your investment.
PERA is still on its baby stage so I can’t really compare its performance to the rest of retirement accounts in the Philippines.
Return of Investment
Out of the three retirement accounts I must say, ETF holds the top spot when it comes to return. It even beat the market last year!
Index Fund would be next choice while PERA, again will be last.
Because there’s not much people who knows what PERA is and how it works, the number of investors taking advantage of its benefits is still low.
When it comes to mutual funds, the volume of investment can play a big role. The more money there is for the fund, the better.
If this is your first investment for retirement, you are still in your 20s to early 30’s, you have money to invest AND you can take as much risk like investing directly in the stock market, I highly recommend investing in ETF as your retirement fund.
If this is your first investment for retirement, you are still in your 20s to early 30’s, you have money to invest BUT you are not as risk-taker, I highly recommend investing in Index Fund as your retirement fund.
If this is your first investment for retirement, you are in your 20s to 40s, you have money to invest AND you can wait until 55 for the return, I highly recommend investing in PERA as your retirement fund.
Final Notes from SavingsPinay
There is no better way to end this thorough retirement guide than to encourage you to act now. If there is a lesson i’d like to impart to you in this post it would be to make the best investment for retirement you could ever make as early as today.
Whether you choose to invest in ETF, Index Fund, PERA or any other investment vehicle, the most important thing to do is get started. Don’t let another month or year pass by without you working towards your future.
I may be not a licensed financial adviser but I hope this post really opened your mind, heart and your finances to the idea of financial independence and early retirement. I plan to write more about this topic in the future.
Help me, help you by commenting below your question about early retirement.
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Izza of SavingsPinay helps Filipinos bridge the financial literacy gap one content at a time by providing insights and tips on budgeting, saving, investing, side hustle and growing your net worth. Aside from this blog she also writes at www.izzaglinofull.com, a beauty and lifestyle blog for frugal Pinays and manages, www.izzagevents.com, a wedding and event business since 2011. For inquiries, topic suggestions or future collaborations email her at firstname.lastname@example.org