Listing of exchange traded funds mulled

The Philippine Stock Exchange is considering the listing of exchange traded funds (ETF) as part of efforts to expand the range of financial products available to the investing public aside from the traditional securities and warrants.

ETFs are open-ended funds which track indexes or sectoral baskets of securities that are listed and traded on a stock exchange. Investors may diversify their portfolios by investing in a single unit of ETF which conveys ownership in a group of securities representing specific industries or market sectors.

Because ETFs are exchange-traded, they are continually priced and can be traded intra-day. They enable investors to easily rebalance their portfolio at a low cost or take advantage of a market trend.

Similar to stocks, ETFs can be bought or sold in the board subject to modest management fees, regular stock transaction taxes and expenses.

PSE president Ernest Leung said ETFs are designed to generally correspond to the price and yield performance of their underlying indexes, either broad stockmarket or stock industry sector.

Leung said Sun Life Asset Management Co. Inc., a subsidiary of listed insurance giant Sun Life of Canada, has signified its ETFs to list in the exchange. This will be coursed through the trading participants initially as distributors of mutual funds and ultimately as traders upon listing with the exchange.

To get it started, the exchange will conduct a survey among its member-brokers to get an indication of their interest level.

To help brokers decide on the merits of its proposal, the PSE has cited the potential benefits and risks of trading ETFs.

Because ETFs are based on underlying basket of securities or an index, they are subject to the same market fluctuations as securities. Investors may lose money over a short period due to fluctuation in the fund’s net asset value in response to market movements and over longer periods during market downturns.

While the creation/redemption feature of ETFs is designed to make it likely that it will trade close to their NAVPS, disruptions to creations and redemptions may result in trading prices that differ significantly from the NAVPS.

The PSE is studying the marketing and possible listing of more mutual funds which at present is limited to the locally-listed Filipino Fund Inc. and the New York-traded First Philippine Fund.

Leung said this will provide another source of income to the brokers through distribution fees or trading commissions. Brokers, however, will first need to pass an examination and obtain a license from the SEC before they can enter into a distribution agreement with the mutual fund company to sell and offer the mutual funds to clients.

At present, the PSE deals only in a limited number of securities which include common stocks, preferred stocks, warrants, depository receipts, the small-denominated Treasury bonds and Treasury bills.