Category Archives: Stocks

US ETFs: Direct Investment vs Feeder Funds

An investor from the Philippines who wants to put money in U.S. ETFs can either choose from a limited menu of locally available feeder funds with U.S. ETF target funds, or directly open an international brokerage account and buy ETF shares directly. Down below is a simple calculator to determine whether it would be worth going through the hassle of opening an international brokerage account to directly invest in U.S. ETFs.

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Can non-US residents trade US options?

The short answer


What are options?

First off, this post is not the right place to learn all about options. Options trading is not for everyone as options are riskier than stocks. Nevertheless, here are the basics: A call option is a contract that allows you to buy 100 shares of stock of a company at a particular strike price. For example, Ford Motor Company shares are currently prices at $8.10. A call option for Ford with a strike price of $10 and expiration date of September 18, 2020 can be purchased for a premium of $0.13 (x 100 shares = $13). The break-even price is the sum of the strike price and the premium:$10.13. Since Ford’s current price is below the option’s strike price, the option is said to be out-ofthe-money (OTM). If Ford’s stock price goes above the $10 strike price, then the option is said to be in-the-money (ITM).

The option premium can move up and down with the price of the stock, as it goes closer or farther to being ITM. Option premiums are also generally higher for volatile stocks. You can sell the option before the expiration date at a profit or loss. If you hold the option until the expiration date and it is OTM, then the option will simply expire and you lose the premium you paid. If you hold the option until the expiration date and it is ITM, then may execute the option and actually buy 100 shares of ford for $10 each (x100 = $1,000). If, for example, Ford’s price at expiration $11 and you execute the call option and sell the stocks right away, then your total profit is $100-$13 (premium) = $87 or a more than 600% gain. If you used the same $13 to buy 1.60 shares of Ford (at $8.10 each) assuming fractional shares area allowed), then you only gain $4.60 if Ford’s price increased to $11.

This illustrates the leveraged nature of options: for the same amount of money, you can potentially have much higher gains buying options than buying stocks. The counterpoint is you can LOSE the entire premium if the bet does not go your way (e.g. the option expires OTM). On the other hand, if you simply bought Ford stock, then at least you can continue holding those shares until it hits your target.

The second type of option is the put option. This is a contract that allows you to sell 100 shares of stock of a company at a particular strike price. Many of the things I discussed about call options apply except in the “opposite” manner. ITM put option means share price is below the strike price. OTM option means share price is above the strike price. The break-even price is the strike price minus the premium paid. You can buy put options if you are betting that the stock price will go down. You can also use put options to hedge against a downward move in the stocks that you own.

How to get started with options trading

When opening a brokerage account with the likes of Charles Schwab or Interactive Brokers, you are typically only given stock trading privileges by default. During the application process, you would have to explicitly ask for options trading capabilities to be enabled in your account. Since options are generally riskier than stocks and offer a variety of trading strategies with increasing levels of risk, brokers typically want to make sure that you are aware of such risks involved.

When I initially applied for my Charles Schwab account, I indicated that I wanted to have options trading enabled in my account. They then sent me an email asking me to call about my options trading application. I was too lazy to make that call so when my brokerage account was finally approved, options trading was not enabled. At that time, I still had my Robinhood account where I can trade options as well. A few months later, I again lodged my application for options trading with Charles Schwab. In the application, they ask for your options trading knowledge level (None, Limited, Good, Extensive), experience (how many years), number of trades per year, and amount per transaction.

Schwab then again asked me to call them. When I did, they asked me about my income, and what trading strategies I am pursuing. They also asked what amount of my brokerage account I will use to trade options, and how I would react if I lose that entire amount. Schwab has four option approval levels, and I applied for and was approved for Level 1.

How much does it cost to trade options?

While Schwab does not charge any commission to buy and sell stocks, it does charge $0.65 per option contract. This fee applies for both buying and selling. For example, that Ford call option with $0.13 premium describe above, will actually cost $13.65 (100*$0.13 + $0.65) to purchase.

PSEi index funds vs the PSEi Total Return Index

In comparing returns from PSEi index funds in the Philippines, the right benchmark to use is the PSEi Total Return Index (PSEi TRI). This is particularly true considering none of the PSEi index funds distribute cash dividends. The PSEi TRI accounts for cumulative price returns and cumulative return sof dividends reinvested back into the index, while the PSEi only accounts for price returns. The PSEi TRI was only introduced in 2019, but its history was back-calculated to 2007. Since it’s pretty new, I haven’t found any freely available resource for the PSEi TRI history. I recently came across this article, And the best equity fund is …, from the Philippine Daily Inquirer. This article was written by someone who is selling financial planning products, so not surprisingly, the article did not actually identify any particular index fund. Fortunately, it did provide some numbers for the PSEi TRI.

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More questions on Philippine taxation of foreign capital gains and dividends

I’ve written a few posts on how the Philippines taxes income from capital gains and dividends from foreign stocks:

It was confusing at first but I have since come to the conclusion that since there is no law or BIR ruling that specifically provides for fixed tax rates or exempts foreign capital gains and dividends, they fall into the catch-all category of “non-business/non-profession” income that will be taxed at ordinary graduated income rates. Still, I have few more questions.

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Home Biased: A Case for More Indexing

This interesting article from Victor Haghani and James White suggests that, given some initial assumptions about investor wealth distribution, the dominant size of the U.S. market (50%) relative to the world market coupled with U.S. home-country bias (80% invested in domestic equities) actually gives rise to higher U.S. market valuations, and lower expected long-term returns. This is the case in spite of the fact that smaller market investors exhibit relatively higher home-country bias (50% invested in domestic equities in markets 5% the size of the world market cap).

How would this apply to countries with extreme home-country bias like the Philippines? If we have a total world market worth $100, with a 50% US market with 80% home-country bias, 10 smaller 4.9% markets with 50% home bias, and a 1% Philippine market with 99% home bias, the calculation would yield that there would be an excess $0.45 demand in a Philippine market that would otherwise have been worth only $1. It would appear that extreme home-country bias in such a small market like the Philippines also has the effect of pushing market valuations higher due to increased demand.

Read Global Impact of Investor Home Country Bias for more discussion on Haghani and White’s article.

Best international broker for Philippine residents: Charles Schwab vs Interactive Brokers

For Philippine residents who want to venture into the international stock market, there are really just a few legitimate options available. For this matter, I don’t consider the likes of eToro and Abra as legitimate platforms for the serious investor or trader. The top three choices for Philippine residents are Charles Schwab, TD Ameritrade, and Interactive Brokers (IBKR). Since Charles Schwab is acquiring TD Ameritrade, I’m only covering Schwab and IBKR. So which one is better for Philippine residents?

(Note that if you’re a Philippine resident and also an American citizen, many of the issues raised here are not applicable to you.)

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Is BPI Invest Global Equity Fund-of-Funds UITF really outperforming its MSCI World benchmark?

In my post on avoiding home-country bias in the Philippines, I mentioned the BPI Invest Global Equity Fund-of-Funds UITF (BPIGLBL:PM) as one of the options in diversifying into international stocks. This fund aims to “provide excess return” over its benchmark, the MSCI World Index, which covers international developed markets.

In June 2019, a number of news articles came out saying that the BPI fund has exceeded $100M in assets, and is now the largest of its kind in the Philippines:

These articles also mention BPI’s claims that its fund has consistently outperformed the benchmark MSCI World Index: “It overtook the returns registered by MSCI World Index – comprised of large and mid-cap equities of 23 developed markets such as United States of America, United Kingdom, Japan, Hong Kong, and Singapore – by 0.94% (year-to-date)to 2.58% (two-years) as of the first quarter of 2019.” This is a pretty bold and impressive claim. But is it true?

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The PSE may be taking a small cut from your PSEi index fund.

In the Philippines, investment fund fees disclosed in a fund’s fact sheet or prospectus typically include trust/management, custodianship, and auditor fees. The fees are a percentage of a fund’s assets under management (AUM). Funds normally have other expenses that are not covered by these fees. Unfortunately, I have not seen any fund honestly disclose its total expense ratio (TER) or ongoing charges figure (OCF) which represent the fund’s total actual cost to the investor. For example, the total expense ratio of the country’s only ETF appear to reach at least 0.8% compared to the fund’s stated fee of 0.50% as discussed in the post: The true costs of FMETF.

Since the funds don’t disclose their TER, it’s always interesting for me to learn about what other expenses these funds may have that are not explicitly stated in the prospectus. I just read from a year-old news article that this year, the PSE has started charging a 0.03% index licensing fee to funds that explicitly mirror the PSE Composite Index (PSEi). As with other fees, this index licensing fee is based on a fund’s AUM. It is said to affect about 15 funds. That number more or less matches the funds listed in and that track the PSEi.

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How to pay lower US taxes on US investments as a non-resident alien from the Philippines

I’ve discussed the important IRS tax issues when investing in the US as a non-resident alien from the Philippines in a previous post. I’ll repeat some of them here in discussing the known ways of lowering or avoiding altogether some of these US taxes.

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