Philippines ETF: Can the Run Continue?

In 2012, Philippines ETFs turned out to be one of the best performing ETFs greatly outperforming the broad emerging market benchmarks. A combination of strong domestic market along with higher public spending provided a boost to the economy (2012 Was Forgettable for These Emerging Market ETFs).

In fact, the economy remains a top choice for firms looking for outsourcing at a relatively cheaper cost as the region has a large and young population base. The government is continuously striving to strengthen the economy with growth heavily dependent on industry and investment drivers.

The robust economic growth rate in the Philippines is ample proof of its economic strength. The 6.6% growth rate clocked in 2012 easily exceeded the government’s 5-6% growth expectation for the economy.

The government expects to sustain the growth momentum in 2013 through public-private partnerships for infrastructure investments.

For 2013, the improvement in the growth rate would also be accompanied with a low level of inflation. Lower inflation will allow interest rates to remain low thereby leading to a positive business environment (4 Best ETF Strategies for 2013).

The global downturn also failed to shake the Philippines economy. Government measures continue to stimulate domestic demand in order to set off the negative impact from weak export.

The central bank of the country had cut the interest rate four times in 2012, bringing the level to its historic low of 3.5%. This further improved domestic demand and helped the economy to maintain its growth.

Additionally, the manufacturing and construction sector of the economy appears to be well poised for growth in 2013. The economy also seems to benefit from tourism and the strength in its consumer and service sector (Can Anything Stop These Southeast Asia ETFs?).

Moreover, the Philippine Stock Exchange index seems to reap the benefit of this healthy growth environment. The Index started the year on a strong note and rallied to post new highs. Going forward, the Index appears to be on the brink of attaining fresh records.

However, the rising peso against the U.S. dollar makes exports expensive from the country. Also, it may hamper the dollar dependent sectors like manufacturing, overseas Filipinos along with BPOs and the service sector.

Overall, it seems that the Philippines has been one of the very strong performers among the emerging markets and still appears to be well poised for further growth. In such a scenario, investors who are looking to capitalize on the growth prospects of the economy can invest in a portfolio of stocks instead of taking the risk of investing in a single security (Philippines ETF: A Rising Star in Emerging Market Investing).

In this context, our top choice to track the economy would be the MSCI Philippines Investable Market Index Fund ((EPHE - ETF report) which currently has a Zacks ETF Rank of 1 or ‘Strong Buy’.

The fund tracks the MSCI Philippines Investable Market Index, which looks to offer investors broad exposure to equities listed in the Philippines (Do Corrupt Countries Make for Great ETFs?). The fund was debuted in Sep 2010 and since then has been able to build an asset base of more than $300 million.

The ETF which is one of the top performing funds in emerging market ETFs trades at a volume of more than half a million shares a day.

The performance of the ETF has been quite remarkable. This ETF added a whopping 45.49% in 2012 and continues with its outperformance in 2013 as well.

In fact, it is trading near its all-time high since its launch and has been recording double-digit gains for its investors. The fund has gained an impressive 14% in the year-to-date period.

Meanwhile, the yield of the fund stands at 0.71% while costs come in at 60 basis points a year (Emerging Markets Dividend ETFs for Income, Growth & Diversification).

Currently, the product has just over 42 securities in its basket. The maximum sector exposure is to Financials (42.3%), Industrials (24.38%), and Utilities (10.0%).

Investors should note that the fund is concentrated in the top 10 holdings with more than 55% of investment. Among individual holdings, SM Investments Corp, Ayala Land and SM Prime Holdings take the top three positions with 10.3%, 8.28% and 6.19%, respectively, of EPHE’s assets.

Clearly, despite the heavy financial exposure, the product has not been hampered by the European crisis, suggesting it could be an interesting choice for those looking for an ETF that is not heavily correlated to the euro zone, which still has the chance to be a strong performer.

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