The Philippines has only one available ETF in the market: the pioneering First Metro ETF (FMETF) which aims to the track the PSE Composite Index (PSEi).

When an ETF receives dividends from corporations whose shares it owns, it can either reinvest those dividends within the fund (accumulating ETF), or distribute the dividends to ETF shareholders (distributing ETF). So under which category does FMETF fall?

Let’s look at FMETF’s stated dividend policy:

The Board of Directors of the Fund may decide to declare dividends from the unrestricted retained earnings of the Fund at a time and percentage as the same Board may deem proper and in accordance with law.

The Fund may declare or pay dividends but limit those dividends to come from the Fund’s accumulated undistributed net income, determined in accordance with PFRS and including profits or losses realized upon the sale of securities; or from the Fund’s earned surplus so determined for the current or preceding fiscal year.

As provided for in the Fund’s By-Laws, the Board of Directors may make arrangements with its stockholders whereby the amount of unrestricted retained earnings not declared as cash dividends and/or other distributions may be reinvested in the Fund’s basket of securities in lieu of cash dividends to be paid to the stockholders. The arrangement with shareholders shall be such that the aforementioned amount of unrestricted earnings dividends to be reinvested in the Fund’s basket of securities shall be declared as stock dividends in accordance with law and valued at the NAVps of the Fund at the time said stock dividends are paid.

The Board of Directors of the Fund intends to declare, as cash dividends, a minimum of ten percent (10%) of the amount of the unrestricted retained earnings derived from the cash dividend income of the portfolio of the Fund based on the latest audited financial statements of the Fund; Provided, that the Board shall pass the appropriate Board resolution covering any dividend declaration, and such dividend declaration shall be disclosed to the SEC, the PSE and the Fund’s website.

First Metro ETF (FMETF) Dividend Policy

The dividend policy appears to allow FMETF to use dividends received to reinvest into the fund, in the form of stock dividends, as well as distribute a 10% portion of it as cash dividends. So is FMETF a confused hydbrid accumulating-distributing ETF? Let’s look at FMETF’s dividend history since the fund’s inception in December 2013:

Ex-Dividend Date	Record Date	Payment Date	Dividend
June 7, 2018	June 8, 2018	July 4, 2018	3% stock
June 5, 2017	June 8, 2017	June 20, 2017	10% stock

The two dividends distributed so far come in the form of stock dividends, and are considered to be reinvestment into the fund. Since FMETF appears to have never distributed any cash dividend, FMETF can then be considered to be a de facto accumulating ETF.

The fact that FMETF has not distributed cash dividends in spite of its declared intention to distribute 10% of the dividends it receives may actually be better for the FMETF investor in terms of taxes. In the Philippines, cash dividends are subject to final withholding tax of 10%. I assume that when FMETF receives the dividends from its constituent stocks, they are already net of the 10% tax. Any cash dividend FMETF distributes would then also be subject to this 10% tax resulting in some kind of double taxation of dividends.

It is therefore more tax-efficient for the investor for FMETF to simply reinvest those dividends into the fund. FMETF should probably do away with its declared intention to distribute any cash dividend, and just simply declare itself as an accumulating ETF.

I do, however, don’t understand why FMETF has to go through the motions of issuing stock dividends every time they want to reinvest the received cash dividends. It just appears to be an unnecessary step. All cash dividends FMETF receives should already be reflected in the fund’s NAV anyway. When they use those funds to buy more constituent shares, the value of those shares will also then be reflected in the NAV. Maybe if FMETF simply declares that it will reinvest all dividends as it receives them, it can do away with this step of issuing stock dividends.

Not surprisingly, FMETF appears to outperform the PSEi as shown in this chart from Bloomberg:

The publicly available data from Bloomberg only goes up to 5 years back. Over these five years we can see that accumulated dividends reflected in FMETF’s returns. The PSE recently introduced the PSEi Total Return Index (PSEi TRI) which computes the index with the assumption that dividends are reinvested.. This would be a better comparison for FMETF. Unfortunately, this total return index does not appear to be available anywhere but on the PSE website, so no direct chart comparison with FMETF can be done.

Summary

• FMETF dividend policy allows for both accumulation and distribution of dividends it receives from its constituent stocks.
• FMETF is a de facto accumulating ETF since it has not distributed any cash dividends.
• FMETF obviously outperforms the PSEi because dividends are reinvested. A better comparison should be done with the PSEi TRI (PSEi Total Return Index)