Strong foreign investor interest in exchange-traded funds tracking Philippine equities listed offshore has sparked expectations that a local ETF market would be successful.  

Last month, the Philippine Stock Exchange (PSE) concluded a consultation on draft rules on ETFs, which are now pending final approval by the country’s Securities and Exchange Commission (SEC). Industry players say they expect the bourse to issue final rules within the first quarter.

Thus far, three banks – Banco de Oro Unibank, Bank of the Philippine Islands and Metropolitan Bank and Trust Company – have expressed interest in launching ETFs.

There are currently two offshore Philippine ETFs that have gained significant traction: BlackRock’s iShares and Deutsche Asset & Wealth Management (DAWM). Each has experienced notable asset growth over the past year in line with the rally of the underlying Philippines market.

As at February 25, the benchmark PSE index had risen 40% to 6,721.33, from 4,799.29 on February 27 last year, with price-to-earnings now at 17-18x, higher than for several other Asian markets such as Indonesia at 14-15x.

The iShares ETF averaged $10 million in daily trading volume last year, about 10% of the daily average trading volume of Philippine stocks.

Meanwhile, the db X-trackers ETF has reached a historical high in AUM of $52.8 million. “For an ETF that was launched just one-and-a-half years ago, we consider such a rate of asset growth a success,” says Marco Montanari, Asia-Pacific head of passive asset management.

“Given the strong fundamentals that have been driving up the Philippine market, foreign investors are increasingly using ETFs tracking Philippine equities,” adds Manuel Schlabbers, head of Asia-Pacific delta one index and ETF Trading at Credit Suisse.

The prospect of the country’s sovereign rating being promoted to investment grade this year by agencies such as Standard & Poor’s is also fuelling positive investor sentiment.

The bulk of the iShares ETF’s trading seems to be done outside Asia; thus far, Schlabbers’ team has only seen a limited number of requests for the product during Asian hours. Most exposure to Philippine stocks in the Asian time zone is gained through index swaps, he says.

Onshore Philippines ETFs are likely to be of interest largely to local retail or institutional investors, at least initially, says Schlabbers, but once there is sufficient liquidity in these products, overseas – probably mostly Asian – institutional investors should be drawn in as well.

DAWM has no immediate plans to launch onshore-listed ETFs tracking local Philippines benchmarks, says Montanari. Other large foreign issuers – namely BlackRock’s iShares and State Street Global Advisors – declined to comment about whether they had any plans in this area.

In any case, the SEC currently only allows locally registered funds to be launched, meaning it would be challenging for a foreign asset manager to participate in the local ETF market.