General

Exchange Traded Funds (ETFs) are funds that trade like a stock. They are an easy-to-use, low cost and tax efficient way to invest your money.

Exchange Traded Fund (ETF) is a pooled investment vehicle that offers diversified exposure to a particular area of the market. It can invest in stocks, bonds, commodities, currencies, options or a blend of assets. Investors buy shares, which represent a proportional interest in the pooled assets. It is very much like a mutual fund but its major difference is that it can be bought or sold throughout the day on a stock exchange at a market price.

ETFs are designed to trade at a price that approximates the market value of their underlying assets. To facilitate this, most ETFs publish detailed information about their portfolio holdings on a daily basis.

Index-based ETFs
Index-based ETFs are available in nearly every style and asset class, covering virtually every segment of the domestic and global equity and fixed income markets. They range from products that invest in the widest coverage of the markets, to those that invest in specific industries.

There are style ETFs that cover the growth and value spectrum and those that track certain market capitalizations. International ETFs cover the global markets and offer exposure to a single country or region of the world. And, finally, there are bond ETFs that cover a variety of duration, credit quality, and maturity ranges

Actively managed ETFs
These types of ETFs are managed to meet a particular investment objective. The portfolio manager actively manages the assets within the ETF to achieve that objective. Actively managed ETFs represent only a small portion of the overall industry.

Commodity and currency ETFs
These ETFs invest in the commodities and currency markets through either physical assets or through the futures markets, allowing investors to gain exposure to alternative investments such as agricultural products, precious metals, energy, and currencies.

Leveraged Products
These are products that use financial derivatives and debt to improve upon the returns of an underlying index. In Hong Kong, Leveraged Products attempt to produce twice times the daily return of their underlying benchmark. This means that losses will also be amplified by two times the benchmark return.

Inverse Products
These products use derivatives to profit from a decline in the value of an underlying asset or instrument. These products are designed to move in the opposite direction from the market they are trying to mirror. Investing in inverse products is popular for short-term traders looking to hedge longer investments or take advantage of falling markets.

Please note that leveraged and inverse Products typically are designed to track a multiple of, or the inverse of, a daily return of the index. These products are not designed to sustain this same multiple or inverse of index return over longer time periods.

Currently, Index-based, Commodity ETFs and Leveraged & Inverse products are available in Hong Kong

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(currently suspended).

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.

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.

Source: HKEx

Trading flexibility
An order to buy and sell ETF shares is executed throughout the trading day at market-determined prices that change continually. On the other hand, an order to purchase or redeem mutual fund shares is executed at the end-of-day price, known as net asset value.

Automatic investing flexibility
While ETFs offer more trading flexibility, mutual funds offer more flexibility when it comes to automatic investing services. Mutual funds typically provide automatic investing and withdrawal services that link directly to investors' bank accounts, services that ETFs typically do not provide.

Costs
While ETFs and mutual funds have some costs in common, ETFs include unique costs not associated with mutual funds.