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ETF

ETF

Introduction to ETF

Exchange Traded Funds (ETFs) are passively-managed and open-ended funds, which are traded on the securities market of Hong Kong Exchanges and Clearing Limited (HKEx). All listed ETFs are authorised by the Securities and Futures Commission (SFC) as collective investment schemes. ETFs are designed to track the performance of their underlying benchmarks (e.g. 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.For further details, please click the following links to ETF issuers.

Types of ETF

ETFs can be broadly grouped into two types:
1. Physical ETFs (i.e. traditional or in-specie ETFs)

Many of these ETFs directly buy all the assets needed to replicate the composition and weighting of their benchmark (e.g. 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. Investors should read the ETF prospectus carefully to ensure they understand how the fund operates.

2. 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 be fully collateralized 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). Investors should read the ETF prospectus carefully to ensure they understand how the fund operates.

Key Features

Benchmark tracking

ETFs are passively managed funds which aim to track closely the performance of the underlying benchmarks.

Transparency

Each ETF has its own website operated by its ETF manager (a list of ETFs’ websites can be found on the HKEx website). ETFs’ websites provide key information such as the underlying benchmarks and the benchmarks’ constituents, the ETF’s Net Asset Value (NAV), the counterparty exposure and details of collateral from counterparties. The NAV of an ETF is the sum of marked-to-market values of the individual portfolio holdings plus the portion of the assets held in cash and cash equivalents, less all the accrued ETF expenses. The NAVs of ETFs are calculated intra-day during the trading hours and at the end of the trading day. The intra-day estimated NAVs, or iNAVs, are also known as RUPVs (Reference Underlying Portfolio Value) or IOPVs (Indicative Optimised Portfolio Value). The end-of-day NAV information may also be obtained on the HKExnews website, in addition to the ETF’s website. Real-time or delayed price quotes for ETFs are disseminated by information vendors and are available on the HKEx website.

Low transaction costs

Unlike unlisted funds, ETFs do not charge any subscription fees. The transaction costs for trading ETFs at HKEx are the same as those for trading other securities, which include brokerage commission, transaction levy, investor compensation levy (currently suspended), trading fee, trading tariff and stamp duty (Some ETFs are exempted from stamp duty).

Low minimum investment

ETFs are traded in board lots and the minimum initial investment is usually set at an affordable level.

Liquidity

ETFs can be traded any time during the trading hours of the securities market. Listed ETFs usually have market makers, which are known as Securities Market Makers, to provide some liquidity. However, market making for the ETFs is available only during the Continuous Trading Session. The list of market makers for each ETF as well as their contact details are published on the HKEx website

Convenience

ETFs are traded through brokers in the same way as other securities and the settlement arrangements are the same.

Diversification

Most ETFs track a portfolio of assets to provide diversified exposure to selected market themes. However, ETFs may also track a single underlying asset such as gold.

Market exposure

While some ETFs provide Hong Kong investors access to a basket of Hong Kong securities, others provide the investors access to overseas markets or other asset classes.

ETF versus unlisted funds

Comparison Items ETF Unlisted index fund
Ways to buy and sell Buy and sell publicly on the SEHK based on its trading price. Buy and sell privately through subscription to and redemption from the fund based on its NAV.
Trading channels Any brokerage licensed by or bank registered with the SFC to carry on a business of dealing in securities. Fund company of the index fund in question or its appointed distributors.
Trading hours SEHK's trading hours of each trading day. Purchases and sales are executed on a real-time basis during each trading day. Each fund has its own defined dealing days, which may not be every business day.

Orders for subscription and redemption of units or shares are executed at the end of the dealing day.
Fund information Information on an ETF, such as the estimated NAV and last closing NAV, is available at the website of the Hong Kong Exchanges and Clearing Limited (HKEx), or the ETF's own website.

The SFC has requested ETFs that use financial derivative instruments to replicate indices to publish on their website information about the issuers/counterparties of the derivative instruments, the proportion of exposure in terms of NAV to each such issuer/counterparty and whether the ETF holds any collateral or separate assets to cover some of this exposure.
Information regarding unlisted index funds is generally available from the fund manager and its appointed distributors. An index fund manager usually sends written notices to unit-holders or shareholders for information about the fund (e.g. dividend notices).

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