Analysis of Common Investment Options for OFWs
Updated: Oct 28, 2021
A great way for OFWs to maximize their earnings abroad is through investing. Instead of just putting their money away in a regular bank savings account, OFWs can instead make that money earn more money by investing. But not all investments are created equal. Depending on several factors, one option may be great for you while it is not so for another. In this post, I will share my analyses of common investment options for OFWs.
I mentioned in the post How to Build a Strong Financial Foundation As An OFW that you need to be prepared, mentally and financially, even before leaving the country. This process includes assessing your financial situation by doing relevant calculations, taking advantage of Philippine government benefits specifically for OFWs, and laying down the arrangements needed so that you can start investing once you’re ready. This post will now show you the available investment options for OFWs where you can put your money in, depending on some factors. Of course, this list is not exhaustive of all investment options available. There are other investment options for OFWs that are not listed here. Instead, this post provides analyses on common investment options for OFWs commonly recommended by other personal finance bloggers. What I’m doing here is just going a step beyond merely listing the available options.
RELEVANT INVESTING FACTORS
This means that this post will mean differently for different people. Relevant factors for this post are the investor’s:
Investment horizon for the security or portfolio; and
So before you proceed, first find out what your investment horizon for a particular investment product is. Investopedia’s simple explanation of investment horizon is: length of time you expect to hold a security or portfolio.
Of course, individual investors have their own personal definitions of their investment horizons. For example, one investor may consider a 10-year time horizon as mid-term while another will consider 10 years as long-term. But for the purposes of this post, we will go by the generally accepted guidelines:
Short-term – Range can be for a few days or months up to 1-3 years.
Mid-term – 3 years to five years
Long-term – More than 5 years
The above guideline should not be considered as hard rules, consider this as a rough guide instead.
Investment Risk Appetite
The second relevant factor for this post is your investment risk appetite. To find out your investment risk appetite, you can take free tests online, like this one. Just like the investment horizon, we’re going to use the generally accepted guidelines for investment risk appetite:
Low risk appetite – A.k.a. conservative investors. People with low risk appetite prefer taking small risks. They are okay with modest but relatively stable returns.
Medium risk appetite – People in this category don’t seek risky investments but don’t avoid them either. They can accept fluctuations in the value of their investments to try and achieve better long term returns.
High risk appetite – People in this category are very comfortable with investment risk. They are prepared to take high risk in exchange of higher returns. They do not overly worry about short-term fluctuations in the value of their investments.
Before you proceed to the next section, figure out what your investment horizon and investment risk appetite first.
RETAIL TREASURY BONDS (RTBs)
Treasury bonds or t-bonds are government securities that mature beyond one year, as opposed to treasury bills, which mature in 1 year and less. The term retail is due to the fact that the face value of RTB is typically low to enable small-time investors, i.e., you and me, to afford it. With a minimum investment of Php5,000, you can start investing in RTBs. And because it is backed by the Philippine government, it is one of the safest investments around. Those who purchase RTBs are eligible to receive interest payments every quarter. RTBs are great for investors with low-risk appetite.
At present there are five maturities of t-bonds:
5 – year
7 – year
10 – year and
This means that whatever your investment horizon is, there is an RTB for you. When buying RTBs, the first thing you have to check is the bond’s coupon rate. The coupon rate is the interest the bond pays annually. For example, the Bureau of Treasury’s 3-year bond issuance on 04 July 2019 has a coupon rate of 4.750% per annum. This means that every year for 3 years, your RTB will generate income or dividends amounting to 4.750% of your bond, divided by 4 since the dividends are paid out quarterly. Coupon rates are fixed, which is an advantage for conservative investors who do not want to see their earnings rise and fall with the movement of the economy and market. However, keep in mind that your dividend earnings are subject to a 20% final withholding tax.
To provide a more concrete example of your potential earnings with RTBs, let’s say you invested Php 10,000 in the 3-year RTB mentioned above, with 4.750% coupon rate per annum. In 3 years, your RTB should earn a total of Php 1,425 in dividends. Annually, you get Php 475.00. Given that dividends are distributed every quarter, you receive Php 117.75 every 3 months. But, not so fast. You have to remember that your earnings are taxed at 20% final withholding rate. So instead of earning Php Php 117.25 per quarter, you actually get Php 95.00 per quarter. Personally, I think that if I’m going to be taxed at this rate, I’d better get higher returns, grrrrrl.
Unless you’re very conservative in your investments (like the type to open savings accounts in different banks up to the amount only covered by PDIC-kind of conservative), I do not recommend investing in RTBs for the long-term. You will be missing out on the potential to earn higher with other investment instruments, and you will be taxed 20% from your already small earnings. There is another investment option that is similarly conservative and backed by the Philippine government, offer higher earning potential, AND is not taxed. If I recommend investing in RTBs at all, it would be only for investing in the short-term, when you need to preserve the value of your money while earning a little bit to cover at least part of inflation. You have to remember that when you buy long-term RTBs – that is, those with tenors of 5-years and onwards – you have to commit to holding your money for that same number of years. There is no easy way to trade your RTBs in the secondary market, unlike when you buy and sell stocks, which you can do through the Philippine Stock Exchange (PSE). The Philippine Dealing and Exchange Corp. (PDEx) is the country’s secondary market for fixed income instruments. However, at this time, it only lists Philippine corporate bonds for trading; Philippine government bonds are not listed in PDEx. Some banks trade government bonds over the counter (OTC) or off-exchange (outside of an exchange), but they usually set minimum transaction amounts. You may have trouble selling your RTB holdings if you have them only in small values.
How to invest in RTBs
If you’re interested in investing in RTBs, you can buy them from selling agents / accredited banks. Check your bank’s website or contact them directly to see if they offer RTBs. You can also buy RTBs directly through the Bureau of Treasury website, www.treasury.gov.ph/rtb.
Pag-IBIG MP2 is a voluntary savings program that allows Pag-IBIG members to contribute and get their money back in 5 years. To be qualified to invest in MP2, you need to be or have been, a Pag-IBIG 1 member first. In its basic formulation, Pag-IBIG MP2 allows you to invest for 5 years with a minimum of Php500 per contribution. Your investments will earn dividends annually, the rate of which is announced and credited by Pag-IBIG in the first quarter(ish) of the following year. For example, the 2018 Pag-IBIG dividend rate was announced and credited on members’ accounts in April 2019. After 5 years, you can withdraw your principal and the dividends earned, tax-free. It carries with it the Philippine government’s guarantee (on the principal and the dividends already earned). But unlike RTBs, the earnings are not guaranteed; the dividends can rise and fall depending on how well Pag-IBIG runs the fund. However, based on Pag-IBIG’s admittedly short history, it has fared well.
Pag-IBIG MP2 Annual Dividends
The beauty of Pag-IBIG MP2 is that you can basically design your MP2 investments to serve a multitude of purposes. I wrote a post about 3 Pag-IBIG MP2 Hacks for Advance Investors, which shows how you can maximize its amazing potential. With a little imagination and creativity, you can actually design your Pag-IBIG MP2 investment to be a long-term investment or a source of regular income. The hacks I described in my MP2 hacks post can be summarized as:
MP2 Rollover, where after your first five years of investing in MP2, you withdraw your principal and dividends and then reinvest everything into another MP2 account. Then after the second 5-year period is up, you do it again, and again. This is a great way to fund your retirement or any other long-term financial goal if you are scared to take risks with your money but still want to earn more than RTBs of bank savings accounts. This scheme is possible because there is no limit on the number of MP2 accounts that you can open.
Dividend Harvesting, where you put in a large sum upfront and opt to receive your dividends annually instead of waiting for it to compound. This scheme is only possible if you invest huge sums at the beginning. This is great if you want to preserve the value of your money and at the same time receive income.
MP2 Ladder, where you open several MP2 accounts, one year at a time, to create a “ladder” of investments that will be due for collecting in succeeding years.
As you can see, Pag-IBIG MP2 is a powerful financial tool that conservative investors can use to achieve various goals, and it is also great for any investment horizon. Short-term, medium-term, and long-term, you can design your MP2 investment to achieve your goal while still remaining as a conservative investor. If there’s any criticism I have of Pag-IBIG MP2, it’s the fact that it has been in operation for a little less than 10 years, so we don’t have any information as to how the fund will fare during economic downturns. We are not sure if Pag-IBIG will be able to sustain its high dividend rate in the future. Additionally, there are no annual reports that investors can review to make sure that their money is being managed efficiently. So far, Pag-IBIG investors are complacent about this lack of transparency because they are receiving high returns.
How to Invest in Pag-IBIG MP2
To start contributing to Pag-IBIG MP2, you need to enroll for an account with Pag-IBIG, either through the nearest Pag-BIG branch or online through this linked website. If you’re abroad, you can contact a Pag-IBIG Fund Services Membership Desk representative, who is usually affiliated with the Philippine Embassy. There are approximately 22 representatives in Asia-Pacific, Europe, North America, and the Middle East. You will be given 1 account number for each MP2 account, which you need to indicate every time you make a contribution. If you have multiple accounts, make sure you give the correct account number when you make contributions.
SSS FLEXI FUND
SSS Flexi Fund is the SSS investment fund dedicated solely to Overseas Filipinos. SSS members in the Philippines can’t invest in the Flexi Fund. The Flexi Fund was created to allow SSS members based abroad to invest more for their retirement, on top of their regular contributions. The fund is invested in Philippine 91-day treasury bills or t-bills or SSS short-term peso placements. SSS is one of the agencies given exemptions from taxation of its investment on t-bills. Additionally, because SSS is a Philippine government agency, investments in the fund are guaranteed by the government. It also allows the investor to withdraw their money in full as long they have invested in the Flexi Fund for at least 12 months. This makes SSS Flexi Fund an option for conservative or low-risk appetite investors. And although SSS designed it to be a supplement to the regular retirement, it can work for investors of all investment horizons since the minimum holding period is only 12 months.
The thing with the SSS Flexi Fund is its outrageous annual management fee, which is equivalent to 1% of the total value of the fund, deducted monthly (a fraction is deducted at the end of the month, which should equal to 1% at the end of the year). This is to purportedly cover the cost of investing and managing the fund. To which I ask: what managing and investing can they be talking about? They don’t need to conduct any intense research or hire a lot of people to do quant calculations. They only have 2 investing options:
91-day treasury bills; and
SSS short-term placement (they do not make clear what this is)
….And then look at the charts, figure out which investment gives out higher earnings per quarter, and put the fund’s money on that option. Come on, people! Remember that other pooled funds – mutual funds, UITFs, ETFs – work the same way as the Flexi Fund. Indeed the SSS Flexi Fund is a government-guaranteed pooled fund similar to Pag-IBIG MP2. We can actually compare SSS Flexi Fund with money market funds. Like the Flexi Fund, many money market funds invest in treasury bills. A casual survey of the available money market funds in the Philippine would show that SSS Flexi Fund is overcharging its investors.
BPI Money Market Fund charges 0.25% annual fees
BDO Peso Money Market Fund charges 0.50% annually
ALMF Money Market fund has an annual fee of 0.50% a year
Even some equity index funds, which are more complicated to manage (Only relatively speaking. Tracking and investing in index funds can be automated, so there’s no reason why they should be charging so high, except for the fact that there’s very little competition in the industry that investors have to accept these astronomical fees.) than the SSS Flexi Fund because equity index funds need to track 30 stocks, charge lower annual management fees. For example, First Metro ETF charges 0.50% annual fees. In conclusion, strictly from an investing point of view, SSS Flexi Fund is a bad investment. There are a lot of other investment options out there where you can put your funds as a conservative investor without losing money from high annual management fees.
SSS PESO FUND
The SSS Perso Fund is a voluntary provident fund offered exclusively to SSS members. Like its sister, the SSS Flexi Fund, the Peso Fund was designed to allow members to contribute more money for their retirement on top of the regular contributions. The Peso Fund allows contributions from SSS members based locally in the Philippines as well as from Overseas Filipinos. To be eligible to invest in the Peso Fund, the member has to be below 55 years old and has not yet filed any final claim with SSS. The Peso Fund invests in 5-year government t-bonds and 91-day treasury bills. It is tax-free and guaranteed by the Philippine government. Investors are allowed to put in a maximum of Php100,000. The fund divides your contributions into 3 baskets:
Retirement/disability – 65% with guaranteed earnings on 5-year t-bond rates
Medical – 25% with guaranteed earnings on 364 days t-bills
General Purpose – 10% with guaranteed earnings on 364 days t-bills
Investors can only withdraw funds from the medical and general-purpose baskets only after 5 years. Withdrawals before the 5-year withholding period is over will be subject to charges and penalties. The retirement/disability basket cannot be touched until the member files a final claim with SSS. This means the SSS Peso Fund should be considered only by investors with a long-term investment horizon.
The SSS Peso Fund charges a 1% annual management fee deducted monthly (a fraction is deducted at the end of the month, which should equal to 1% at the end of the year). Just like what I already mentioned above with the SSS Flexi Fund, this is absolutely ridiculous. From a strictly investing standpoint, this is another bad investment.
STOCK MARKET INVESTING
Stock investing is such a huge topic so I will be making broad strokes and huge generalizations here.
To explain it simply, investing in the stock market means buying and selling a piece of a publicly-listed company. It gives you a share of the company’s profits (and losses). Stocks can be bought through initial public offerings (IPOs) and through the secondary market or the stock exchange. Investors earn from stock market investing through:
Stock price increase (and then selling them)
In general, most people involved in stocks are either traders or investors. Trading involves making trades that last for seconds or minutes, taking advantage of short-term fluctuations in an asset’s price. Investors, on the other hand, are those who buy and hold stocks for the long-term.
Those who want to engage in stock trading need to carefully study the stock market, be comfortable with high risks, and should not be trading with money they are not ready to lose. Additionally, they should dedicate a huge portion of their day in monitoring their portfolio, since trading is premised on the exploitation of momentary inefficiencies in the stock market. If you have a full-time job and do not have a stomach of steel, day trading may not be for you. But, if you do decide to trade in stocks, make sure that you educate yourself properly before starting. Learn how to read company reports and other related documents. Familiarize yourself with the terminologies of stock trading. Formulate a strategy and stick to it. One of the reasons why so many people lose money when trading in stocks is because they tend to follow the mob. Instead of educating themselves and learning how to design their strategy and implement it, they lean on Facebook pages and so-called “gurus” to tell them what to do and when to buy and sell. Basically, the mob mentality leads these unfortunate people to the slaughterhouse. Notice that in many Filipino stock trading Facebook pages, they call their positions “play”. It’s a clue, people. Besides, stocks trading comes with more expenses such as trade commissions and more taxes. Each time you execute a trade, you have to pay broker fees and other commissions plus the 0.6% stock transaction tax when selling. If you want to do stock trading, think really hard if it’s for you. It is appropriate for people with (very) high-risk appetite and short-term investing horizon. If you can’t afford to lose money, do not engage in stocks trading.
On the other hand, long-term investing is buying shares of selected companies and holding the position for months or even years, hoping that the value of the shares will rise. Compared to trading, long-term investing has a slow pay-off. However, it is comparatively less stressful and does not require constant and close vigilance. A lot of people who invest long-term in the stock market choose blue-chip companies and/or those who distribute regular dividends. If you want to invest long-term in the stock market, you have to do your research and commit to a strategy for entrance and exit into the position. But just because you invest in the stock market long-term does it mean that the stocks you pick will be sure winners. You still run the risk of losing money with long-term stock investing. So pick wisely and be prepared to cut your losses, if needed. Long-term investing is ideal for people with high-risk investment appetite.
How to invest in the Stock Market
The easiest way to invest in the stock market is by opening an online trading account. There are a lot of options out there. I personally have been using AB Capital Securities, which allows clients to open an account with zero balance. I also have great experience with First Metro Sec Pro, which I reviewed in my post, Initial Thoughts on First Metro Sec Pro. Once the account is set up, fund your account through wire transfer or bank deposit. Watch or read the tutorials provided on how to navigate the platform. After that, you can already start trading.
Pooled funds are professionally managed investment portfolios that allow investors to pool their money together to invest in something, for a fee. Most people know pooled funds as mutual fund, unit investment trust fund (UITF), or exchange-traded fund (ETF). The easiest way to distinguish between the three is by following this guideline:
Mutual fund – managed by an investment company and regulated by the Securities and Exchange Commission (SEC)
UITF – managed by a bank and regulated by the Bangko Sentral ng Pilipinas (BSP)
ETF – regulated by the SEC and traded like a regular stock
There are different types of funds available, depending on the underlying assets the fund managers invest in: money market, bonds, balanced, and equities.
Types of Mutual Funds
Money Market Fund
Money market funds invest only in highly liquid instruments such as cash, cash equivalent securities, and t-bills. This kind of fund offers high liquidity with a very low level of risk. It is ideal for investors who want to preserve the value of their money for the short-term and have a low-risk appetite.
These are invested primarily in government or corporate bonds and other debt instruments. Some companies offer US dollar-denominated bond funds invested in US dollar-denominated issuances by the Philippine Government and public corporations. Bond funds offer stability, with low gains (but higher than bank savings account or money market accounts). It is ideal for investors with low-risk appetite and has short- to mid-term investment horizon.
Balanced funds are designed in such a way as to take advantage of the high growth potential of stocks or equities and the stability of bonds and other debt instruments. The goal is to provide gains higher than money market and bond funds by investing in stocks while at the same time stabilizing the value of the fund through bonds. Balanced funds are higher risk compared to bonds and money market so it is ideal for investors with medium-risk appetite with mid-term to long-term investing horizon.
Equity funds are funds that invest in stocks. By investing in stocks, there is a possibility of higher gains and losses compared to other fund types. There are two kinds of equity funds:
Actively managed funds – management focuses on outperforming the market compared to a specific benchmark, in the Philippines, the Philippine Stock Exchange index (PSEi). Its goal is to beat the PSEi.
Equity index funds – mimic the movement of a certain index. Again in the Philippines, the PSEi. Some companies also fund of funds or feeder funds invested in US equity index funds.
There is a lot of debate online on which type of equity fund is a more efficient use of money, by consistently giving higher returns to investors and lower fees. I’m a big Boglehead so for me personally, I believe in index fund investing. I even wrote extensively about the subject in my post, Ultimate Guide to Philippine Index Funds. Equity funds are ideal for people with high-risk investment appetite and a long-term investment horizon.
Investing in pooled funds offer the following advantages:
(Relatively) Easy to buy and sell
A wide range of options to choose from
Investing can start for as low as Php5,000 to Php 10,000
Putting your money in pooled funds can be a great way to invest your money. On the other hand, more seasoned or advanced investors stay away from pooled funds because by putting your money in funds, you have very little control over how your money will be invested. Many managers and fund sales agents are not very transparent about their products. Some even deceive clients by omitting necessary information. Further, depending on the bank or investment company, you may lose a huge portion of your gains since pooled funds can be expensive. They charge annual management fees, maintenance, exit, and third-party fees.
There is a pooled fund for everyone. The trick is to find which one is the best for you. This means that before investing your money, you have to do your due diligence first. Many people rely too much on their financial advisors (who should be called sales agents instead) instead of reading and studying on their own. They do not realize that their financial advisors are actually compensated by selling them the most expensive investments. Rappler’s Leloy Claudio actually talked about this very issue in one of the episodes of his Basagan ng Trip show (where your mawma was given a shoutout!).
How to do your due diligence
So how do we do our due diligence? First, read the prospectus of the fund. Usually, it’s available on the company’s website. If not, you can ask your advisor to send you a copy of the prospectus. ALL funds have prospectuses. If your financial advisor cannot or is unwilling to provide you one, run away as fast as you can.
Once you have the prospectus, read and understand it as much as you can. Some of the things you should be looking at are the fees, expense ratios, and the fund strategy. After reading the prospectus, look at the entire historical performance of the fund, not just the 1,3, or 5-year fund performance, if available. Compare how your fund has historically fared compared to its benchmark. Short-term performance can be very misleading. And of course, double or even triple check how much the fund’s annual management fees are. There may be some funds that perform really well but are very expensive. Stay away from these funds because they will eat away your profits.
As a rule, equity funds charge the highest fees, ranging from .5% to 2.5% a year. If your money market or bond fund charges the same percentage, stay away. I want to give a special shoutout to First Metro ETF (ticker symbol: FMETF), which is an equity index fund, for offering the lowest annual management fee in the market at 0.5%. This is not a paid advertisement. And if ever you’re wondering, yes, I will move my investments to another equity index fund if they offer lower annual management fees, have a decent PSEi tracking error, and convenient to buy and sell.
How to invest in pooled funds
To invest in pooled funds, contact the bank or investment company of your choice and ask for their assistance in buying the fund you want. Usually, information about these funds are available online. If you want to invest in FMETF, you need to open an online brokerage account and buy and sell FMETF the same way you would a stock.
PERSONAL EQUITY AND RETIREMENT ACCOUNT (PERA)
PERA is a scheme started by the government to allow Filipinos to voluntarily invest for their retirement in selected qualified investment instruments. Overseas Filipinos can invest up to a maximum of Php200,000 while Philippine-based investors can contribute up to Php100,000 a year.
Although the BSP allows different investment instruments to be PERA-qualified, so far, the only available options in the market UITFs. At this time, only Bank of the Philippine Islands (BPI) and Banco de Oro (BDO) offer PERA-qualified products. Land Bank will soon launch its own selection of PERA-qualified instruments. To learn more about PERA, you can read my article What is PERA and Why You Need One Right Now. But to recap, here are the benefits of PERA:
Income tax exemption from the investments and its reinvestment.
Claim 5% income tax credit of your total PERA contribution.
PERA cannot be touched in case of insolvency
Provision for the possibility of private employers to contribute to their employee’s PERA up to the maximum amount allowed. (I haven’t heard of any Philippine employer that gives PERA contribution as a benefit but you know, it might happen soon).
As I mentioned, at this time, there are a few PERA-qualified UITFS. If you want to know more about these products and read a thorough analysis of them, read my article Ultimate Guide to PERA Investment Instruments.
I think that everyone should invest in PERA as soon as they join the workforce. By investing in PERA, you use the power of time and compounding to ensure that you will have a comfortable retirement and not become a burden to your loved ones in old age. Putting money away in PERA will not only benefit you; it will also benefit your children, who will not be burdened with your care in your old age.
I think that most people realize that their pension from SSS or GSIS will not be enough to live off from their retirement until the time they pass away. If you’re one of the few people who’s still thinking of relying on SSS or GSIS to fund their retirement, please read my post, What Retirement Looks Like for the regular Filipino Professional. To summarize the findings of that post, if you only rely on a government-mandated pension, you will have a hard time during your retirement years.
Unfortunately in the Philippines, we are not really big planners, especially for events that will happen 3 or 4 decades into the future. Planning for retirement is practically absent in our country. Or if people think about retirement at all, it is geared towards buying expensive traditional or variable life insurance (VUL), thinking that there is very little alternative. This is why I recommend investing in PERA to everyone because it simplifies investing for retirement.
Of course, not all PERA-qualified UITF is good. If you are still in your 30s-40s, I suggest that you buy a PERA equity account. Both BPI and BDO offer equity accounts: the BPI PERA account is actively managed with a 1.5% annual management fee and the BDO PERA account is an index fund with a 1% annual management fee. Between the two, I am inclined to recommend the BDO PERA Equity Index Fund.
How to Invest in PERA
Unfortunately, most BPI and BDO branches are not yet familiar with PERA. For BPI, you can contact them via email at PERA@bpi.com.ph or telephone at 580-2607 or 580-2640. To apply for a BDO PERA account, you must have a BDO online account. Once you have access to their online banking, you can open a PERA account directly inside your account. You need to have an account with these banks before you can open PERA.
There are many ways for OFWs to invest in the Philippines. I just covered some of the most common ones that are accessible to most people and will not put them in debt (unlike, say, for example, real estate and franchising).
As an OFW, you should be very careful and make your due diligence before putting your money in an investment. There are a lot of people out there ready to pounce and take your money in the guise of “helping”.
If you are an OFW, you have probably been invited or even attended financial literacy workshops organized by banks or investment companies. While I commend efforts to spread financial literacy to our OFWs (for free!), many of these workshops are nothing more than a venue for the organizers to sell their products. This is not necessarily a bad thing but you should be skeptical of all claims. Ask for evidence and documents, and independently investigate the offerings yourself.