exchange traded funds - hsbc · etfs have a clear role within our suite of investment funds. and...
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For professional clients only
An Introductory Guide
Exchange Traded Funds
Exchange-Traded Funds (ETFs) started to be used in Europe in the early 2000s but over the past few
years they have grown their share of the investment market significantly. This trend has been supported
by investors’ increasing focus on costs as well as growing evidence of index-based strategies
presenting a strong viable alternative to other type of funds investing across developed markets.
ETFs are listed on a stock exchange, meaning that they are bought and sold like shares. However,
in contrast to UK equities, as ETFs pay stamp duty on equity purchases, investors do not have to explicitly pay stamp duty when they buy ETFs
through their broker or a fund platform.
Being listed on a stock exchange also adds a certain level of transparency compared to non-listed
investment vehicles. ETFs are priced throughout each trading day, rather than only once a day as is the
case with most mutual funds. This can add a layer of comfort, particularly in times of high volatility, that an investor can sell or buy its ETF investment at a
particular point in time during a trading day.
In addition, investors typically get totally up-to-date information on ETF holdings whereas mutual funds disclose this usually only once a month, and even then this tends to cover only the largest holdings.
Exchange Traded Funds 3
Investing in an ETF: why do it and howWhy invest in an ETF? ` Access to markets
A huge spectre of ETFs available means that there are funds
enabling access to many different markets. There are broadly-
based ETFs that provide exposure to whole regions or even
the entire asset class of global equities as a whole, as well
as more focused funds that invest only in single countries or
sectors of industry.
` Determining the timing of your trades
Given ETFs’ continuous pricing, investors can buy or sell
their ETF shares at any time when the market is open. This
is important particularly during the times of high volatility,
when share prices can fluctuate significantly in the course of
a trading day.
` Transparency
Investors can get real-time information on an ETF’s holdings.
This can help in making a better-informed decision about the
composition of an investment portfolio.
` Economies of scale
As with any shares, investors pay a fixed broker’s fee every
time they buy ETF shares, and that fee does not depend on
the size of investment. Therefore, compared to mutual funds,
which charge an initial fee as percentage of the amount
invested, ETFs present economies of scale.
Know How
Physical or Synthetic Index Replication?
Today, there are two main ways a fund can replicate an index,
by either buying the underlying assets in that index or by using
derivatives to mirror the performance of that index. The first
method is known as physical replication and the second is
synthetic.
When a fund uses full physical replication, all the underlying
assets are held in the proportion equal to their weighting in the
index. However, when the index contains so many constituents
that trading them runs the risk of eroding fund performance
(MSCI World Index with its 1,643 constituents is a good
example1), holding only a proportion of the underlying index
might be a better alternative. This can be achieved through an
optimisation process.
Synthetic ETFs rely entirely on the use of derivatives. They buy
swap contracts where the other side, a counterparty, commits
to pay the fund daily returns equal to the performance of the
benchmark index, and all dividends. For this, the ETF pays the
counterparty a fee and the performance of the physical assets
it holds, and all the dividends they generate. However, there is
always a risk that a counterparty does not honour its contract and
defaults on its obligations.
We believe that buying all of the stocks in the underlying index
in the same proportion as the index is the best approach to
take, as it allows us to construct funds with a high degree of
transparency and simplicity, without compromising their ability
to track an index closely. In our view, the risks associated
with synthetic replication – the most important of which is
counterparty risk – are not worth being exposed to.
The importance of due diligence
ETFs may differ from mutual funds in the way they are traded
and structured but products from different providers may vary
just as much as mutual funds. In order to incorporate high quality
ETFs into a portfolio, the funds will need to be evaluated as
thoroughly and diligently as in the case of active or index mutual
funds. Investors should also consider spreading the risk by
dividing their ETF exposure between different providers.
Among the key factors that need to be considered as part of due
diligence are:
` Underlying index and its coverage
` Provider’s rules determining index composition – they govern
which companies are included in an index and which are left
outside its scope
` Liquidity of the underlying market
` Fund costs
When it comes to comparing fund costs, we believe it should
be done based on ETF’s total cost of ownership. This way, a
comparison would take in account not only management fees
and the Ongoing Charges Figure (OCF), but also transaction
costs.
ETF’s total cost of ownership comprises the costs of holding and
trading the fund. The first category would include the OCF and
rebalancing costs, while the second one will cover transaction
costs, any additional brokerage commission, tax and currency
fluctuations if applicable.
1 Source: MSCI as at 30 September 2015.
The design of our ETFs reflects your and your clients’ views and requirements.
We have committed to only use physical replication for our ETFs.
We also pay a lot of our attention to the fact that fees have a significant impact
on investment returns over a long term. ETFs costs are generally relatively low but, nevertheless, there is a wide range of fees charged by ETF providers. We draw on our scale and operational efficiency to deliver highly competitive all-inclusive fees. Our
overall underlying objective is to offer great value for money on all of our ETF products.
Our range of physical ETFs offers a range of features and benefits that our clients
have asked for.
Exchange Traded Funds 5
ETFs from HSBC: A Competitive EdgeTransparency ` Every HSBC ETF publishes a full list of securities that it holds
on a daily basis, in addition to up to date fact sheets on our
website www.etf.hsbc.com
` Our fee structure is transparent: the OCF comprises the
management fee and a list of other costs carried by the asset
manager which include administration, custody and audit
fees, legal, regulatory and registration expenses. There is no
entry or exit fee.
` As ETFs trade on stock exchanges, they are subject to a
bid-offer spread and broker commissions in the secondary
market. In the primary market investors will be charged the
creation or redemption fees in addition to the brokerage
commission. Creation/redemption fees are charged by the
Authorised Participant to cover transaction costs, custodian
fees and taxes where applicable. These fees are available
on request.
Cost effectiveness ` We keep our charges to an absolute minimum by harnessing
our global capabilities and existing local expertise worldwide,
especially in the emerging markets. This results in very
competitive OCFs on most of our funds.
Accurate index tracking ` We apply our robust quantitative portfolio management,
trading and risk monitoring processes to ensure the
efficiency of HSBC ETFs both in terms of tracking difference
and tracking error.
Asset allocation building blocks ` For each of our ETFs we have selected indices that we
believe our clients find most relevant for each of the
underlying markets. Therefore, our ETFs can be used by
clients as effective building blocks for globally diversified
equity portfolio.
Liquidity and accessibility ` In addition to other market makers, HSBC Global Banking and
Markets is committed to providing liquidity and competitive
spreads on exchange.
` Our ETFs are listed on the main European exchanges and
registered for sale in several more European markets to
make it easier for clients to access them.
Controlled risk ` All our ETFs use physical replication so our funds do not carry
derivative counterparty risk which is normally associated with
synthetic ETFs.
Did you know?In Europe we offer a wide range of equity ETFs, ranging from the major developed markets to single emerging markets such as
Brazil and Russia. Our HSBC MSCI Russia Capped UCITS ETF was the first Russian ETF available in Europe that tracks the locally
listed market and is composed mainly of local Russian stocks. The ETF uses full physical replication.
HSBC only offers ETFs that invest physically in relevant stocks. We don’t offer swap-based ETFs since we believe that the
physical approach allows us to deliver products that are inherently simpler and better understood.
6 Exchange Traded Funds
An investment partner you can trustChoosing the right exchange traded fund (ETF) for your
investment portfolio is about selecting the right investment
partner that can offer products with attractive features. HSBC
ETFs are managed by HSBC Global Asset Management, a
leading global investment manager that has a long track record
of providing sound investment solutions to a wide range of
investors around the world. We manage over 800 investment
funds in more than 20 countries and territories around the world.
ETFs have a clear role within our suite of investment funds. And
since we don’t just manage ETFs, we aim to bring you and your
clients the benefit of our experience and scale in managing a
diverse range of investment products worldwide.
We have been managing ETFs since 2003 after launching our
first products in Hong Kong. Since 2009 we have been offering
ETFs in Europe.
Our European ETF range covers all the main developed and
emerging equity markets.
HSBC ETFs: Keys Facts ` Physical-only investment approach
` High levels of transparency
` Highly competitive all-in fees
` Coverage of developed and emerging markets
` Sharp focus on risk control
Exchange Traded Funds 7
Key RisksMarket risk:
The value of investments and any income from them can go
down as well as up, and investors may not get back the amount
originally invested.
Investment horizon:
Stockmarket investments should be viewed as a medium to long
term investment and should be held for at least five years.
Currency risk:
Where overseas investments are held, the rate of currency
exchange may cause the value of such investments to go down
as well as up.
Emerging market risk:
Investments in emerging markets are by their nature higher
risk and potentially more volatile than those inherent in some
established markets.
Geographic risk:
Some of the funds invest predominantly in one geographic area;
therefore any decline in the economy of this area may affect the
prices and value of the underlying assets.
Performance risk:
Past performance is not an indication of future returns.
8 Exchange Traded Funds
This document is intended for professional clients only and
should not be distributed to or relied upon by retail clients.
The material contained herein is for information purposes only
and does not constitute investment advice or a recommendation
to any reader of this material to buy or sell investments. Care has
been taken to ensure the accuracy of this document, but HSBC
Global Asset Management accepts no responsibility for any
errors or omissions contained therein.
Fund information
HSBC ETFs are sub-funds of HSBC ETFs plc, an investment
company with variable capital and segregated liability between
sub-funds, incorporated in Ireland as a public limited company,
and authorised by the Central Bank of Ireland. The company
is constituted as an umbrella fund, with segregated liability
between sub-funds.
Shares purchased on the secondary market cannot usually
be sold directly back to the Company. Investors must buy and
sell shares on the secondary market with the assistance of an
intermediary (e.g. a stockbroker) and may incur fees for doing so.
In addition, investors may pay more than the current Net Asset
Value per share when buying shares and may receive less than
the current Net Asset Value per Share when selling them.
All applications are made on the basis of the current HSBC ETFs
plc Prospectus, relevant Key Investor Information Document
(“KIID”), Supplementary Information Document (SID) and Fund
supplement, and most recent annual and semi-annual reports,
which can be obtained upon request free of charge from HSBC
Global Asset Management (UK) Limited, 8 Canada Square,
Canary Wharf, London, E14 5HQ. UK, or from a stockbroker or
financial adviser. Investors and potential investors should read
and note the risk warnings in the prospectus, relevant KIID, SID
and Fund supplement. UK-based investors in HSBC ETFs plc are
advised that they may not be afforded some of the protections
conveyed by the Financial Services and Markets Act (2000), (‘the
Act’). The company is recognised in the United Kingdom by the
Financial Conduct Authority under section 264 of the Act.
Restrictions
The shares in HSBC ETFs plc have not been and will not be
offered for sale or sold in the United States of America, its
territories or possessions and all areas subject to its jurisdiction,
or to United States persons. Affiliated companies of HSBC Global
Asset Management (UK) Limited may make markets in HSBC
ETFs plc.
Index disclaimer
The EURO STOXX 50 is the intellectual property (including
registered trademarks) of Stoxx Limited, Zurich, Switzerland and/
or Dow Jones & Company, Inc., a Delaware corporation, New
York, USA, (the “Licensors”), which is used under license.
The securities based on the Index are in no way sponsored,
endorsed, sold or promoted by the Licensors and neither of the
Licensors shall have any liability with respect thereto.
All rights in the FTSE 100 and the FTSE 250 (the “Indices”)
vest in FTSE International Limited (“FTSE”). “FTSE®” is a
trademark of London Stock Exchange Group companies and is
used by FTSE under licence. The HSBC FTSE 100 UCITS ETF
and the HSBC FTSE 250 UCITS ETF (the “Products”) have been
developed solely by HSBC Global Asset Management (UK)
Limited. The Indices are calculated by FTSE or its agent.
FTSE and its licensors are not connected to and do not sponsor,
advise, recommend, endorse or promote the Products and do
not accept any liability whatsoever to any person arising out
of (a) the use of, reliance on or any error in the Indices or (b)
investment in or operation of the Products. FTSE makes no
claim, prediction, warranty or representation either as to the
results to be obtained from the Products or the suitability of the
Indices for the purpose to which they are being put by
HSBC Global Asset Management (UK) Limited. “FTSE®” is a
trade mark of the London Stock Exchange Group companies,
“NAREIT®” is a trade mark of the National Association of Real
Estate Investment Trusts (“NAREIT”) and “EPRA®” is a trade
mark of the European Public Real Estate Association (“EPRA”)
Important information
Exchange Traded Funds 9
and all are used by FTSE International Limited (“FTSE”) under
licence). The FTSE EPRA/NAREIT Developed® Index is calculated
by FTSE. Neither FTSE, Euronext N.V., NAREIT nor EPRA
sponsor, endorse or promote this product and are not in any way
connected to it and do not accept any liability.
The funds or securities referred to herein are not sponsored,
endorsed, or promoted by MSCI, and MSCI bears no liability
with respect to any such funds or securities or any index on
which such funds or securities are based. The Supplement to
the Prospectus contains a more detailed description of the
limited relationship MSCI has with HSBC ETFs plc and any
related funds.
Standard & Poor’s and S&P are registered trademarks of
Standard & Poor’s Financial Services LLC (“S&P”) and Dow
Jones is a registered trademark of Dow Jones Trademark
Holdings LLC (“Dow Jones”) and have been licensed for use
by S&P Dow Jones Indices LLC and sublicensed for certain
purposes by HSBC Global Asset Management (UK) Limited.
The S&P 500 and the S&P BRIC 40 are products of S&P Dow
Jones Indices LLC, and have been licensed for use by HSBC
Global Asset Management (UK) Limited. HSBC Global Asset
Management (UK) Limited’s HSBC S&P 500 UCITS ETF and
HSBC S&P BRIC 40 UCITS ETF are not sponsored, endorsed,
sold or promoted by S&P Dow Jones Indices LLC, Dow Jones,
S&P, their respective affiliates, and neither S&P Dow Jones
Indices LLC, Dow Jones, S&P, their respective affiliates make
any representation regarding the advisability of investing in such
product(s).
To help improve our services and in the interests of security, we
may record and/or monitor your communications with us. HSBC
Global Asset Management (UK) Limited provides information
to institutions, professional advisers and their clients on the
investment products and services of the HSBC Group.
This document is approved for issue in the UK by HSBC Global
Asset Management (UK) Limited, who are authorised and
regulated by the Financial Conduct Authority. HSBC Global Asset
Management (UK) Limited provides information to institutions,
professional advisers and their clients on the investment
products and services of the HSBC Group.
Copyright © HSBC Global Asset Management (UK) Limited 2016.
All rights reserved.
www.assetmanagement.hsbc.com/uk
27512CP/ED1015/FP15-1746 - expiry 21/10/2016
Notes
10 Exchange Traded Funds
Notes
Exchange Traded Funds 11
ContactFor more information, please contact us:
Email: [email protected]
Telephone: 0800 358 3011
Website: www.assetmanagement.hsbc.com/passive