Philippines Tax Reform Bill Passed: ETFs In Focus

Philippines President Rodrigo Duterte’s tax reform bill was passed by the lower house of the parliament after the third and final reading. This resulted in a landslide victory with 246 votes in favor and just 9 against with 1 in abstention.

The bill is expected to give a boost to tax revenue in order to fund Duterte’s infrastructure expansion goals. The administration has promised to increase infrastructure spending to 7.4% of GDP by 2020.

One of the primary issues the economy faces is low revenue generation, a goal the administration expects to achieve through this reform. Moreover, Moody’s affirmed the country’s credit rating at Baa2 on a stable outlook.

Per Philstar, the Department of Finance (DOF) has predicted that the complete package of the tax reforms would boost revenues by 2% of GDP by 2019. Moreover, measures to simplify tax bureaucracy are expected to add revenues of another 1% of GDP.

Although the bill has been passed in the house, there is still high uncertainty regarding the final bill being passed in due course by the senate. The administration targets to implement this new tax system in 2018. Under the new system, the revenue foregone owing to lower corporate taxes will be compensated by higher excise levies on oil, automobiles, beverages etc.

This has boosted confidence in the economy. Per Bloomberg, investors are pouring in money into Philippines stocks, as $399 million worth of inflows have been seen since April 1, 2017.

Let us now discuss the most popular ETF focused on providing exposure to Philippine equities.

iShares MSCI Philippines ETF EPHE

This fund seeks to provide exposure to Philippine stocks primarily in the large cap segment.

It has AUM of $199.72 million and charges a fee of 64 basis points a year. From a sector look, Real Estate, Industrials, and Financials are the top three allocations of the fund, with 24.03%, 23.48% and 22.59% exposure, respectively (as of June 9, 2017). Ayala Land Inc, SM Prime Holdings Inc, and BDO Unibank Inc are the top three holdings of this fund, with 9.50%, 9.35% and 7.50% exposure, respectively (as of June 9, 2017). The fund has returned 15.21% year to date but lost 0.79% in the last one year (as of June 9, 2017). It currently has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.

We will now compare the fund’s performance to a broader South East Asia based ETF, ASEA.

Global X Southeast Asia ETF ASEA

This fund provides broad exposure to the five members of the Association of Southeast Asian Nations, Singapore, Indonesia, Malaysia, Thailand, and the Philippines. It is appropriate for investors looking for a diversified exposure to South East Asia (read: Bank Indonesia Leaves Rates Unchanged: ETFs in Focus).

ASEA is less popular with an AUM of $12.03 million and charges a fee of 65 basis points a year. From a geographical perspective, the fund has 30.64% exposure to Singapore, 22.11% to Thailand, 21.77% to Malaysia, 20.24% to Indonesia and 5.23% to Philippines (as of March 31, 2017). Financials, Telecommunication Services, and Industrials are the top three sectors of the fund, with 45.10%, 16.05% and 7.86% allocation, respectively (as of March 31, 2017. DBS Group Holdings Ltd, Oversea-Chinese Banking Ltd, and Singapore Telecommunications Ltd are the top three holdings of the fund, with 7.13%, 6.55% and 6.00% allocation, respectively (as of March 31, 2017). The fund has returned 17.79% year to date and 19.15% in the last one year (as of June 5, 2017). ASEA currently has a Zacks Rank #3 with a Medium risk outlook (read: Malaysia Growth at 2-Year High: ETF in Focus).

Below is a chart comparing the year-to-date performance of the two funds.

Source: Yahoo (NASDAQ:YHOO) Finance

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