As we all know, the outlook on the Philippine economy has been looking bright lately, culminating in upgrades of the Philippine sovereign debt to investment grade and the Philippine stock market remaining hot. This has created interest among Filipinos now residing outside the Philippines to investment in the Philippine stock market. However, most are turned off by having to go through the effort of opening a Philippine broker account and depositing money and trading in pesos. For Filipinos in the United States, fret not. There is an ETF that you can invest in and in the process participate in any up moves in Philippine stocks, the iShares MSCI Philippines ETF (symbol: EPHE).

As an ETF, it is traded like individual stocks throughout the day. Like mutual funds, it allows diversification because it is a basket of Philippine company stocks. Unlike mutual funds, however, it does not charge sales load, purchase fees or redemption fees so its expenses are usually lower.

The basket of stocks that compose EPHE does not duplicate the Philippine Stock Exchange (PSE) Index, however.  Although it could have, the sponsors of EPHE probably believed they can outperform the market.  A comparison of the 10 largest holdings of EPHE with its weights in the PSE index shows the following:

comparison of the 10 largest holdings of EPHE with its weights in the PSE index

Some of the glaring differences are the following:

  1. PLDT is underweighted significantly in EPHE (6.7% vs 12.0%).
  2. SMPH is significantly over weighted in EPHE (5.46% vs 3.63%).
  3. BPI is significantly underweighted in EPHE (3.6% vs 5.95%).

So the million dollar question then is has the EPHE succeeded in outperforming the PSE index? Unfortunately, it has not – short term or long term, as the comparison below shows.

Had you invested in EPHE 6 months ago, you would have barely broken even. With the PSE index, you would have gained 8.3%.

iShares MSCI Philippines ETF

Meanwhile, had you invested in EPHE 3 years ago, you would have gained 43.0%. With the PSE index, however, you would have gained significantly more,  60.3%.

iShares MSCI Philippines ETF 3 years

The 6 month performance obviously looks worse for EPHE because of the impact of the change in currency exchange rates.  (The EPHE is US dollars and while the PSE index is in pesos, so consequently, the former includes the impact of changes in currency rates). Remember, the peso went down quite a bit in the last 6 months. However, over 3 years, the peso has gone up, so there is no excuse for EPHE to underperform the index.  Furthermore, EPHE charges additional for management fee, so right off they lag performance from the start.

With a dismal performance such as described, perhaps one is better off opening up his/her Philippine broker account and deposit/trade in Philippine peso, if one can.