Index investing and rebalancing

(Part 2)

In last week’s column, we covered the basics of equity indices and index rebalancing. Today we will go over the different stock indices that cover Philippine companies mainly from the Philippine Stock Exchange (PSE) and Morgan Stanley Capital International (MSCI).

The Philippine Stock Exchange and its indices PSE Composite Index (PSEi). The PSEi is perhaps the most commonly used yardstick to refer to the performance of the Philippine stock market. It is composed of the 30 most active and highly capitalized stocks listed on the exchange and is used as a benchmark to measure the overall performance of the Philippine stock market.

Sector Indices. The PSE also maintains six sector indices representing each major sector under the industry classification of the exchange:

a. Financials Index

b. Industrial Index

c. Holding Firms Index

d. Property Index

e. Services Index and

f. Mining & Oil Index.

The All Shares Index (ALL). Includes all of the stocks listed on the PSE, regardless of market capitalization, this providing a broader measure of the performance of the Philippine stock market compared to the PSEi.

MidCap Index. Represents the mid-cap segment of the Philippine market, aiming to capture the performance of mid-sized companies in the Philippine market. It is composed of a fixed basket of 20 companies with the largest market capitalization after constituents of the PSEi.

Dividend Yield Index. Focuses on companies that consistently give high-yielding dividends. The 20 companies in this index are selected based on liquidity and three-year average dividend yield performance.

The MSCI Index

A family of market capitalization-weighted indices designed to measure the performance of various equity markets around the world, covering both developed and emerging, each designed to represent a specific market/segment.

A benchmark to measure the performance of investments, as well as to gain exposure to specific markets/segments of the global equity market via exchange-traded funds (ETFs) that track the performance of specific MSCI indices.

Popular MSCI indices

MSCI World Index. Tracks the performance of large and mid-cap stocks in 23 developed countries, widely considered to be a benchmark for global equity markets.

MSCI Emerging Markets Index. Tracks the performance of large and mid-cap stocks in 27 emerging markets, widely used benchmark for investors seeking exposure to emerging markets.

MSCI EAFE Index. Tracks the performance of large and mid-cap stocks in developed markets outside of North America. EAFE stands for Europe, Australasia, and the Far East. It is a popular benchmark for investors seeking exposure to international developed markets.

MSCI Philippines index. A benchmark index for the Philippine stock market maintained by MSCI Inc. designed to measure the performance of the large and mid-cap segments of the Philippine stock market.

Other world market indices

With digital investing platforms now widely available to Filipino investors, it makes sense to also learn about other world market indices when investing in global index funds.

United States

1. S&P 500. A market capitalization-weighted index that tracks the performance of 500 large-cap companies listed on the stock exchanges in the United States, often used as a benchmark for the overall performance of the US stock market.

2. NASDAQ Composite. A market capitalization-weighted index that tracks the performance of over 3,000 companies listed on the NASDAQ stock exchange. As one of the largest stock exchanges catering to tech companies, it is often used as a benchmark to gauge the performance of the technology sector.

3. Dow Jones Industrial Average. A price-weighted market index that tracks the performance of 30 large, publicly owned companies listed on stock exchanges in the United States. The companies in the Dow are typically blue-chip companies with a long history of success.

Japan:

4. Nikkei 225. A market capitalization-weighted index that tracks the performance of 225 large, publicly traded companies listed on the Tokyo Stock Exchange in Japan. The Nikkei 225 is often used as a benchmark for the overall performance of the Japanese stock market and economy.

Europe:

5. Euro Stoxx 50. A free-float market capitalization-weighted index that tracks the performance of 50 large, blue-chip companies from 12 Eurozone countries and is often used as a benchmark for the overall performance of the Eurozone stock market and economy.

6. FTSE 100. A market capitalization-weighted index that tracks the performance of the 100 largest companies listed on the London Stock Exchange (LSE). The FTSE 100 is often used as a benchmark for the overall performance of the UK stock market and economy.

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Join us on April 20 at 12:30pm, for the first installment of SharePHIL Capital Market Conversations: Effects of Index Rebalancing on Price and Market Behavior. Sign up for the Zoom webinar link at: https://bit.ly/unlocktheindex

To join us in person at Dusit Thani Manila, register at: https://bit.ly/sharephil202304

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About the authors:

Ed Francisco is president of BDO Capital and Investment Corporation, the investment banking arm of BDO Unibank Inc. and serves as the vice chairperson of the Shareholders’ Association of the Philippines (SharePHIL).

Karlo Lim is a senior associate of BDO Capital’s Corporate Finance Team with experience covering mergers and acquisitions, loan syndications, transaction advisory, and capital market transactions.

To learn more about SharePHIL, visit https://bit.ly/m/sharephil