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ETF introduction

 

1. What are the ETFs

ETF is the abbreviation of the Exchange Traded Fund, which is an investment product in the spot market of the Hong Kong Stock Exchange. ETF invests in a basket of securities or commodities to closely follow the performance of the benchmark index and commodity. It allows investors to invest in a specific market/portfolio rather than a single stock and also break the restrictions of geographical and investment channels to invest in the different asset types in different regions around the world. Therefore, investors can achieve the benefits of a diversified investment portfolio and cost-effectiveness.

 

2. What are the advantages of ETF

1. Convenient Trading: the trading method is the same as trading ordinary stocks, and investors can trade during the trading hours;
2. The entry barrier is low: the trading unit is per lot, which is suitable for the capital requirements of all types of investors;
3. High Transparency: the benchmark indexes tracked by ETFs are generally public and well-known. Investors can easily obtain relevant data on these benchmark indexes.
4. Low Transaction Fees: exempt all ETF stamp duties

 

3. How does the ETF track the performance of the underlying index

Most ETFs track the underlying indexes through the following three strategies:

 

(1) Fully Replicate The Strategy

Such as the Tracker Fund (02800). The fund manager will invest in these index stocks according to the proportion of the benchmark index components. Fund managers can closely replicate the performance of benchmark indexes. The advantage of this replication strategy is that it enables the ETF to achieve the most accurate tracking, while the disadvantage is that the cost and transaction fees are higher, especially when the index constituents are numerous or less circulated.

 

(2) Representative Sampling Replication Strategy

Such as the S&W CSI Hong Kong 100 Index Fund (02825). The fund manager builds a portfolio that has similar returns, risk, market capitalization, and investment characteristics to the benchmark index. ETFs using this strategy is less expensive than the former because the portfolio holds fewer shares. However, it does not follow the index as closely as a full replication strategy, so there may be a degree of tracking error.

 

(3) Synthetic Replication Strategies

Such as the Leading Global ETF (02812). ETFs using this strategy does not necessarily hold constituent stocks directly, but rather use derivatives such as equity-linked swaps to achieve a low-cost, performance-tracking effect. The fund manager is able to obtain an accurate performance of the benchmark index from the issuer of the equity-linked swap, thus ensuring near-full performance and low tracking error, but with higher counterparty risk, valuation risk, and liquidity risk.

 

4. Is there a risk of tracking error in ETFs, and how is it generated

Tracking error is the standard deviation or volatility of the difference between the performance of an ETF and its benchmark index returns. The causes of tracking error include:

 

1. Benchmark indices are not subject to deductions for fees, such as management fees, which are borne by the ETF.

2. There are no fees associated with index-adjusted constituents, and ETFs incur transaction costs to adjust constituents.

3. When an index adjusts its constituent stocks, there is no trading aspect, but the ETF has to actually buy or sell the securities. If there is a rapid change in the constituents of an index, such as a sharp rise, fall, suspension of trading or the prohibition of short selling, etc., the ETF may not be able to adjust the constituents in real time in accordance with its operational strategy, which will result in greater variation between the constituents of the ETF and the constituents of the index, and hence greater tracking error.

 

5. How is the bid/ask price of an ETF determined

The trading price of an ETF should be very close to its reference NAV. However, the trading price of an ETF is influenced by market supply and demand and may differ from the reference NAV. Excessive demand may cause the ETF to trade at a price higher than the reference NAV and vice versa. When the trading price is above its reference NAV, there is a premium. Conversely, when the trading price is below its reference NAV, there is a discount.

 

6. Will I receive the dividends if I hold the ETF

Like stocks or mutual funds, ETFs are entitled to dividend distributions, if any. In general, ETFs tend to have a dividend payout policy if their investment assets are in equities or bonds. If the investment assets are in the commodity series, there is no dividend payout policy. Please refer to the detailed terms and conditions of the product for the dividend payout policy.

 

7. Do I need to pay management fees for investing in ETFs

Most ETFs charge a management fee in the form of a Total Expense Ratio (TER). Like other mutual funds, the management fee is calculated and accumulated daily from the net asset value (NAV) of the ETF. The management fee is deducted directly from the assets of the ETF on a regular basis. Generally, ETFs charge lower fees than mutual funds.

 

协议及声明

ETF introduction

 

Except for public holidays and the market closure due to bad weather, the Hong Kong stock market generally trades from Monday to Friday. The trading hours are as follows:
 

1. Pre-open Period

Time period

Trading Rules

Enter order 9:00-9:15

Submit, modify, and cancel auction market orders and auction limit orders

Non-cancellable 9:15-9:20

Only at-auction market orders and at-auction limit orders can be submitted, and orders cannot be withdrawn or modified

Random match period 9:20-9:22 (match will start randomly at 9:20-9:22 at the final reference equilibrium price)

Conduct matchmaking during auction period

Pause period, from random match period ends to 9:30

At-auction order: Incomplete order will be cancelled by the system; At-auction limit order: If the input price range of an incomplete order does not deviate from the nominal price by nine times or more, it will be converted to a limit order and automatically transferred to the continuous trading session

 

2. Continuous Trading Hours

Time period

Beijing Time

Morning market

9:30-12:00

Closed at noon

12:00-13:00

Afternoon market

13:00-16:00

Note: Order modification is not allowed during the closed at noon, and cancellation is allowed during 12:30 - 13:00.

 

3. Closing Auction Trading Session

Time period

Trading Rules

Closing auction period 16:00-16:01      

Calculate and publish reference price; orders cannot be submitted

Enter order 16:01-16:06

You can submit, modify, and cancel at-auction market orders and auction limit orders. The price limit of auction limit orders shall not exceed ±5% of the reference price

Non-cancellable 16:06-16:08

At-auction market orders and at-auction limit orders can be submitted, and cannot be cancelled or changed; the input price of at-auction limit orders must be between the lowest selling price and the highest bidding price

Random closing 16:08-16:10

At random closing time, at-auction market orders and at-auction limit orders can still be submitted, and cannot be cancelled or changed; the input price of auction limit orders must be between the lowest selling price and the highest bidding price