Everything You Need To Know About Exchange Traded Funds And The Hong Kong Stock Market 2022—Hong Kong Exchanges and Clearing Limited (HKExCL) is the securities market where Exchange-Traded Fund (ETFs) can be traded (HKEx). The Securities and Futures Commission (SFC) has approved all listed ETFs as collective investment schemes.

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Introduction

An ETF’s goal is to mimic the performance of the underlying benchmark it tracks (such an index or a commodity, for instance).

such as gold, etc.) and provide investors with a cost-effective means of getting exposure to a wide range of investment opportunities.

of the market’s core concepts. ETFs can be purchased or sold through a broker in the same way as conventional securities.

any time throughout the trading hours of the stock market

Main Characteristics Of ETFs

Keeping Track Of Benchmarks
Funds that track the performance of their underlying benchmarks as precisely as possible are known as exchange-traded funds, or ETFs.

Transparency
There is a list of ETFs’ webpages on the Hong Kong Stock Exchange’s website (the HKEx website). In addition to the underlying benchmarks and their constituents, the ETF’s Net Asset Value (NAV), the counterparty exposure, and the specifics of collateral from the counterparties, the ETF’s website provides critical information such as these: To calculate an ETF’s net asset value (NAV), you add up the marked-to-market values for all of the fund’s assets, minus the value of the assets held in cash and cash equivalents. During trading hours and at the end of the trading day, ETFs’ NAVs are determined. RUPVs (Reference Underlying Portfolio Value) and IOPVs (Intra-Day Estimated NAVs) are other terms for iNAVs (Indicative Optimised Portfolio Value). In addition to the ETF’s website, the HKExnews website provides the end-of-day NAV information. Information providers disseminate and make available on the HKEx website ETF price quotations in real time or delayed time.

Minimal Monetary Outlay
In contrast to unlisted funds, ETFs do not require a monthly fee to be held. HKEx charges the same fees for trading ETFs as it does for trading other securities, including brokerage commission, transaction levy, investor compensation levy (now halted), trading fee, trading tariff, and stamp tax. 1. Low initial investment threshold

Board lots are used to trade ETFs, and the minimum initial commitment is typically low.

Liquidity
At any time throughout the trading hours of the securities market, ETFs can be purchased and sold. Securities Market Makers (SMMs) are typically used to offer some liquidity for a listed ETF.
Market making for ETFs, on the other hand, is only available during the CTS. There is a list of ETF market makers and their contact information available on the HKEx website (www.hkex.com.hk).

Convenience
As with other securities, ETFs are traded and settled through brokers in a similar manner.

Diversification
To provide a broad range of market exposure, most ETFs track a diverse portfolio of assets. ETFs, on the other hand, can track a specific asset, such as gold.

Exposure To The Market
A number of ETFs are available in Hong Kong that give investors exposure to Hong Kong shares, while others allow investors to diversify their portfolios and invest in other asset classes.

Variety In ETFs

ETFs fall into one of two categories:

Real-world ETFs (ie traditional or in-specie ETFs)
All the assets needed to match the composition and weighting of their benchmark ETFs are purchased directly by several of these ETFs (eg constituents of a stock index). As a result of this, some investors only buy a fraction of what is required to replicate the benchmark, or assets that are highly correlated with the benchmark but are not part of it. The underlying equity-based indices of some physical ETFs may also be partially invested in futures and options contracts, however, this is rare. Read the ETF prospectus thoroughly to ensure that you understand how the fund works.

ETFs that don’t hold any real assets
ETFs based on their benchmark don’t buy the assets in their portfolios. To mimic the benchmark’s performance, they invest in financial derivative products. There must be full collateralization for all of the ETFs’ derivative investments, which are published on the ETF’s website. Read the ETF prospectus thoroughly to ensure that you understand how the fund works.

To detect synthetic ETFs, investors can refer to their prospectus and related papers, as well as the marker X at the beginning of their stock short name. The ETF section of the HKEx website has a complete list of synthetic ETFs.

ETFs Carry A Number Of Risks

There Is A Risk To The Other Party
The counterparty risk of the derivatives issuers means that synthetic ETFs may experience losses if the derivatives issuers default or fail to honour their contractual commitments. For example: as derivative issuers are mostly international financial institutions, the collapse of one derivative counterparty of a synthetic ETF may have a “knock-on” effect on the other synthetic ETF counterparties. This should be taken into account. Despite the fact that synthetic ETFs are fully collateralized from their counterparties, this may not totally remove the counterparty risk. ETFs may suffer considerable losses if they are unable to collect on a collateral claim because the collateral’s market value may be significantly lower than the amount secured.

The Danger Of Losing Money In The Market
ETFs are vulnerable to the economic, political, currency, legal, and other risks of a certain industry or market associated to the index it is tracking. When markets are falling, managers of ETFs do not have the freedom to take defensive bets. Risk and volatility associated with the benchmarks must be accepted by investors.

The Risk Of Tracking Error
Differences in ETF performance from its benchmark are known as tracking errors. The impact of the TER, changes in the composition of the underlying benchmark, and the type of ETF can all cause tracking error (physical vs synthetic). Although there isn’t a standard definition, an ETF’s total expenses (TER) can comprise everything from management fees to stamp duties to the cost of generating financial reports and other required documents, including legal and auditing charges and the cost of custody services. The prospectus of an ETF reveals the anticipated TER. Other factors, such as dividends and other portfolio income, may have an impact on an ETF’s NAV, which means that the estimated TER may not accurately reflect the fund’s tracking error. Moreover, in the case of a synthetic ETF, its indirect costs may only be reflected in the market value of the derivatives it holds

The Danger Of Trading Below Or Above Nav
An ETF’s market price may be lower or higher than its net asset value (NAV). Due to supply and demand variables this price difference is more likely to appear during times of significant market volatility and uncertainty. ETFs targeting specific markets or sectors that are subject to direct investment limitations may also experience this occurrence. Therefore, even if the NAV is higher upon selling, investors who acquire at a premium may suffer losses and not fully recoup their investment if the ETF is terminated.

Risk Of A Sudden Drop In The Market’s Liquidity
There is no guarantee that active trading will be maintained at all times, despite the fact that ETFs often include one or more market makers (known as Securities Market Makers, or SMMs). As a result of the SMMs’ failure to meet their responsibilities, investors may not be able to trade the ETF or may find that its market price is below or above its NA

Questions About Etfs That Are Frequently Asked

Where Can I Find Out More About Each ETF’s Performance
There is a wealth of information available on the ETF’s website, such as its prospectus, annual reports, fund fact sheet, NAVs, underlying benchmark values, holdings, historical performance, and more. Hong Kong Exchange (HKEx) has a link to each ETF’s webpage in its ETF section on its website (www.hkex.com.hk). The HKExnews website is also a good source for ETF information given by the ETF managers.

What Is The ETF’s Benchmark
The ETF’s prospectus and website can provide information about the ETF’s benchmark. On the ETF area of the HKEx website, HKEx also publishes the benchmarks.

To Find An ETF That Uses Synthetic Replication, How Can I Know
To determine if an ETF is a synthetic ETF and to learn about the associated risks, you should read the prospectus and any related materials. An other way to identify a synthetic ETF is to look for an X at the beginning of the stock’s short name. Physical and synthetic ETFs can be found in equal measure on the HKEx website’s ETF category page.

Rqfii ETFs Are What They Sound Like: Investments In The Rqfii Stock Market
QFII stands for RMB Qualified Foreign Investment. ETFs formed using the RQFII investment quota authorised by mainland regulators are RMB-denominated physical A-share ETFs. An A-share index can be tracked via RQFII ETFs, which invest RMB raised outside China directly in a portfolio of A-shares. Dual-counter RQFII ETFs can be traded in either RMB or US dollars (i.e. RMB and HKD).
Stock codes 82800-82849 and 83000-83199 are used to identify RMB ETFs trading on Hong Kong’s HKEx exchange. Individual RQFII managers and the Hong Kong Stock Exchange and Securities and Futures Commission have further information about RQFII ETFs. Please visit the HKEx website (www.hkex.com.hk/eng/global/faqhkex.htm) for further details.

What Is Rqfii ETFs Dual Counter Model
RQFII ETFs that use the Dual Counter model have two trading counters (i.e. RMB and HKD) available to investors for secondary trading purposes. Both the RMB and HKD counters will be paid in RMB and HKD, respectively, when trading units. Because the RMB counter and the HKD counter are two unique and distinct markets, the trading prices of units of the identical RQFII ETF in the two counters may differ. There are no differences in treatment between the two exchanges’ units, which are all the same.

If their brokers provide both HKD and RMB trading services and offer inter-counter transfer services to facilitate Dual Counter trading, investors can normally purchase and sell units traded on the same counter or buy on one counter and sell on the other counter. Even if the trades take place on the same trading day, inter-counter buy and sell is permitted. The trading price of RMB and HKD units exchanged may differ and may not always be closely linked, depending on factors such as market demand, supply, and liquidity in each of the counters.

To Buy Or Sell ETFs, Where Should I Go
In the same way that you purchase and sell conventional assets, you can buy and sell ETFs. To trade ETFs, you don’t need to open a separate account.

What’s The Bare Minimum You Have To Put Up
It is the ETF managers who determine the size of a board lot, which is used to trade ETFs.

When Buying Or Selling ETFs, Am I Required To Pay Any Transaction Fees
Investor compensation levy, trading fee, trading tariff, and stamp duty are all charges that must be made when purchasing or selling the security. These are charges that are similar to those associated with buying and selling other types of securities. Stamp duty is not charged on several ETFs.

How Much Do ETFs Charge For Their Management
In the prospectuses of individual ETFs, you’ll discover information about management fees and other costs.

Exactly How Long Do I Have To Keep ETFs Before I Can Sell Them Off
ETFs can be traded on the same day as ordinary securities.

Are Dividends Paid On ETFs
The majority of ETFs distribute dividends to their investors. The ETF managers set the frequency and timing of dividend payments. Some ETFs, however, do not pay dividends at all. You should familiarise yourself with the ETF prospectuses’ distribution policies.

Is There A Market Maker For ETFs
SMMs (Securities Market Makers) are commonly used to help provide liquidity for listed ETFs. SMMs must comply with a set of HKEx-mandated obligations, including limits on the maximum bid/ask spread, quote size, and response time. The ETF portion of the HKEx website lists the SMMs and their responsibilities for each ETF.

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