Frequently Asked Questions 
14/03/2011 
 

Chapter 6 Products - Securities Market

6.9

Exchange Traded Funds (ETFs) 


6.9.1  

What are ETFs? 

Exchange Traded Funds (ETFs) are passively managed and open-ended funds. All listed ETFs on the HKEX securities market are authorised by the Securities and Futures Commission as collective investment schemes.

ETFs are designed to track the performance of their underlying benchmarks (eg an index, a commodity such as gold, etc) and offer investors an efficient way to obtain cost-effective exposure to a wide range of underlying market themes. Similar to other securities, investors can buy or sell ETFs through their brokers anytime during the securities market’s trading hours.

 

6.9.2

What types of ETFs are there? 

ETFs can be broadly grouped into two types:
 

  1. Physical ETFs (ie traditional or in-specie ETFs)

Many of these ETFs directly buy all the assets needed to replicate the composition and weighting of their benchmark (eg constituents of a stock index). However, some only buy a portion of the assets needed to replicate the benchmark or assets which have a high degree of correlation with the underlying benchmark but are not part of it. 

Some physical ETFs with underlying equity-based indices may also invest partially in futures and options contracts. Lending the shares they own is another strategy used by some physical ETFs. Investors should read the ETF prospectus carefully to ensure they understand how the fund operates. 

  1. Synthetic ETFs

These ETFs do not buy the assets in their benchmark. Instead, they typically invest in financial derivative instruments to replicate the benchmark’s performance. The ETFs are required to have collateral when investing in derivatives (details of the net and gross counterparty exposure and types and composition of the collateral are published on the ETF’s website). An ETF’s net risk exposure to any single counterparty (ie net of the value of any collateral provided) cannot be more than 10 per cent of its NAV. Investors should read the ETF prospectus carefully to ensure they understand how the fund operates.

6.9.3

What should be noted before investing in ETFs? 

As with other products, investors in ETFs should understand their own risk appetite and the product details.  Also, they should refer to the prospectuses and websites for individual ETFs, and consult their brokers or investment advisers on the investment merits of the products.  Investors should note that some ETFs may have larger tracking errors than others and ETFs may trade at a premium or discount to NAV. Further, synthetic ETFs are subject to counterparty risk associated with the derivatives issuers. For more information about the risks involved, please read the ETF leaflet which can be downloadable from the ”Exchange Traded Funds” section on the HKEX website.

 

6.9.4.

How can investors identify an ETF adopting synthetic replication strategy? 

Investors should read the ETF’s prospectus and related documents carefully to have a better understanding of the product.  In addition, a marker X is placed at the beginning of the English and Chinese stock short names of all synthetic ETFs listed on the Stock Exchange. 

The stock short name of ETFs:

Synthetic ETF

X

 

Q

Q

Q

Q

Q

Q

Q

Q

Q

Q

Q

Q

Q

Physical ETF

Q

Q

Q

Q

Q

Q

Q

Q

Q

Q

Q

Q

Q

Q

Q

X: A marker representing a Synthetic ETF using synthetic replication strategy (through the use of swaps or other derivative instruments) to gain exposure to a benchmark index/asset

Q: Up to 13 characters (for Synthetic ETF) or 15 characters (for Physical ETF) representing the issuer and/or the benchmark index/asset 

Further, the “Exchange Traded Funds” section of the HKEX website has a full list of physical and synthetic ETFs. 

 

6.9.5

Where can investors obtain information on each ETF? 

Investor can refer to the individual ETF’s website which shows detailed information about the ETF, including its prospectus, annual reports, fund fact sheet, NAVs, underlying benchmark values, holdings, historical performance, etc. The hyperlink to an individual ETF’s website can be found in the "Exchange Traded Funds" section of the HKEX website. ETF information submitted by the respective ETF managers can also be obtained from the HKEXnews website.

 

6.9.6

Do ETFs pay dividends?

Most ETFs pay dividends to their unit holders. The frequency and timing of dividend distribution are determined by the ETF managers. Investors are advised to read the distribution policies specified in the prospectuses of the ETFs.

 

6.9.7

Do ETFs have market makers?

Yes, listed ETFs usually have market makers, known as Securities Market Makers, or SMMs, to help provide liquidity. SMMs are subject to a set of obligations prescribed by HKEX with respect to the maximum bid/ask spread, quote size, response time, etc. The names of the SMMs as well as their obligations for each ETF can be found in the "Exchange Traded Funds" section of the HKEX website.

 

For further details, please refer to "Exchange Traded Funds" of "Securities Products" under the "Products & Services" section of the HKEX website.