If you’re a Filipino investor and you want your investment portfolio to diversity into U.S. index funds, you have at least two options. One option is to open a trading account with a company like Charles Schwab. This will give direct access to thousands of U.S. stocks and ETFs.
An easier option is to invest in a unit investment trust fund (UITF) that acts as a feeder for a U.S. index fund. One such feeder fund is the BPI Invest U.S. Equity Index Feeder Fund (BPIUSFF). This fund invests directly in the largest ETF in the world, the SPDR S&P 500 Trust ETF (SPY). This ETF has total assets of almost $280 billion as of November 2019. It simply aims to track S&5 500 index of U.S. large cap companies. One reason why people like to invest in index funds is the low expense ratio. SPY’s gross expense ratio is only .0945%.
Now, BPI’s SPY feeder fund has the following fees:
| fEE tYPE | FEE |
|---|---|
| Trust Fee | 0.75% |
| Custodianship Fee | 0.0084% |
| External Auditor Fee | 0.0082% |
| Broker’s Fee | 0.0300% |
| Total | 0.7966% |
The feeder fund’s expense ratio is then at least 0.7966%. This is collected based on the value of the fund’s assets under management. The daily net asset value of the fund already reflects the fund’s total assets minus fees and expenses. The total expense ratio for just the feeder fund may be a bit more as other fund expenses are not covered by the fees. Since the feeder fund’s 0.7966% fee is on top of the master fund SPY’s 0.0945% expense ratio, the effective expense ratio is at least 0.89%.
So SPY has 0.0945% expense ratio and BPIUSFF has effective ratio of 0.89%. What does this mean in practical terms? BPIUSFF was launched in August 5, 2014 so we can compare what your returns would have been if you invested in BPIUSFF at the beginning vs investing directly with SPY on the same date.
If you invested $10,000 (100 units) in BPIUSFF on August 5, 2014, it would be worth an impressive $16,630 on November 18, 2019, reflecting the bull run in the U.S. market.
SPY closed on August 5, 2014 at $192.01. If you invested $10,000 based on that closing price, and assuming for the moment that fractional shares are allowed, then you’ll own 52.08 shares of SPY. On November 18, 2019, SPY closed at $312.02. Your 52.08 shares would have been worth $16,250. Now why do BPIUSFF’s returns appear to be higher than that of SPY in spite of the former’s higher fees? The reason is that the SPY ETF over that same period of time distributed a number of quarterly dividends. The BPI feeder fund received those dividends on your behalf and reinvested them. Now since August 5, 2014, SPY has issued a total of $24.77 in dividends per share (S&P 500 Index (SPY) Dividend History):
| EX-DIVIDEND DATE | cASH dIVIDEND aMOUNT |
|---|---|
| 09/20/2019 | $1.384 |
| 06/21/2019 | $1.432 |
| 03/15/2019 | $1.233 |
| 12/21/2018 | $1.435 |
| 09/21/2018 | $1.323 |
| 06/15/2018 | $1.246 |
| 03/16/2018 | $1.097 |
| 12/15/2017 | $1.351 |
| 09/15/2017 | $1.235 |
| 06/16/2017 | $1.183 |
| 03/17/2017 | $1.033 |
| 12/16/2016 | $1.329 |
| 09/16/2016 | $1.082 |
| 06/17/2016 | $1.078 |
| 03/18/2016 | $1.05 |
| 12/18/2015 | $1.212 |
| 09/18/2015 | $1.033 |
| 06/19/2015 | $1.03 |
| 03/20/2015 | $0.931 |
| 12/19/2014 | $1.135 |
| 09/19/2014 | $0.939 |
So, add about $1,290 in dividends to $16,250 and you have a total of $17,540 compared to $16,630 from BPIUSFF.
Some caveats:
- If you are a Philippine resident, IRS will require that 25% tax be withheld from your dividends, so this cuts your dividends to $968 giving you a total of $17218. I assume that the dividends that the BPI fund receives are also already net of the 25% taxes.
- So comparing SPY’s $ 17,218 versus BPIUSFF’s $ 16,630, the difference is $588. So you would have earned 3.5% more if you had invested in SPY directly.
- Also note BPIUSFF was able to benefit by reinvesting the dividends as they received them. In our calculations, the cash dividends were not reinvested.
- If you try this DRIP Returns Calculator, you’l see that $10,000 with (untaxed) dividends reinvested yields $18,033 instead of the $17,540 (untaxed total) we calculated earlier: almost 2.85% more. Even if the dividends you reinvest were reduced by the 25% tax, you will still end up with more than the $17,218 total we calculated earlier.
To summarize, in table form:
| BPIUSFF | SPY | |
|---|---|---|
| 08/05/2014 | $10,000 100 units NAVpu = $100 | $10,000 52.08 shares $192.01 |
| 11/18/2019 | $16,630 NAVpu = $166.30 | $16,250 312.02 |
| Uninvested Cash Dividends | N/A | $1,290 $24.77/share |
| Less Tax on Cash Dividends | N/A | $322.50 |
| Total | $16,630 (with reinvested dividends) | $17,218 (3.5% higher!) (could be higher if dividends were reinvested) |
So, after about 5.25 years, a $10,000 SPY investment would have earned 3.5% ($588) more than a BPIUSFF investment. If dividends were reinvested, the difference would have been higher. This shows the effect of the higher expense fees associated with BPIUSFF. Obviously there are associated costs with opening a U.S. trading account. Transferring money entails wire transfer fees. In the end, depending on your total investment amount and time horizon, those initial account setup and wire transfer fees would have been lower than the fund management fees you would end up paying to BPI.
Of course, both investments have grown by at least 65%. So whether you invested in BPIUSFF or SPY, you would have been able to participate in the U.S. bull market. Over the same time period, the PSE Composite Index has grown by about 13%. But, as always, past performance is not a guarantee of future returns.
