Exchange Traded Funds. An Introductory Guide. For professional clients only

Transcription

1 Exchange Traded Funds An Introductory Guide For professional clients only

2 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.

3 Investing in an ETF: why do it and how Why 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 broadlybased 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 example 1 ), 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 Exchange Traded Funds 3

4 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.

5 ETFs from HSBC: A Competitive Edge Transparency ` ` 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 ` ` 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. 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. 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. 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. Exchange Traded Funds 5

6 An investment partner you can trust Choosing 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 6 Exchange Traded Funds

7 Key Risks Market 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. Exchange Traded Funds 7

8 Important information 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 ) 8 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. 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 All rights reserved CP/ED1015/FP expiry 21/10/2016 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 Exchange Traded Funds 9

10 Notes 10 Exchange Traded Funds

11 Notes Exchange Traded Funds 11

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