ETF stands for exchange traded fund.

ETF is an open-ended fund that can be traded like a share on a stock exchange. ETF is also an index-tracking collective investment fund that aims to track the performance of the underlying index by holding a portfolio of the constituent stocks of that index. ETFs have been issued in many countries/territories, such as the United States, Canada, Japan, Singapore and Hong Kong. As of 31 January 2005, there were 423 ETFs worldwide with USD306.55 billion of assets under management.

Most ETFs are designed to match as closely as practicable the performance of the underlying index. For example, TraHK, the first ETF listed in Hong Kong, is designed to track the performance of the Hang Seng Index.

Tracking is usually achieved by using full replication or representative sampling strategies.

Using a full replication strategy means that the ETF will invest in the constituent stocks of the underlying index in substantially the same weightings these stocks have in the index, and hence, the performance of the ETF will closely match the performance of that index. In Hong Kong, TraHK adopts a full replication strategy to track the performance of the Hang Seng Index and holds constituent stocks of Hang Seng Index in substantially the same weightings these stocks have in the Hang Seng Index.

An ETF adopting a representative sampling strategy holds a sample of stocks that have similar features such as market capitalisation, industry weights and liquidity to the underlying index. ETFs that use this strategy tend to have a higher risk of tracking error than those using a replication strategy.

Most ETFs are passively managed by fund managers who will invest in the constituent stocks of the underlying index according to their respective weightings in the underlying index.

When a constituent stock or its weighting in the underlying index changes, fund managers are responsible for implementing the necessary adjustments to the ETF's portfolio of stocks to ensure that the composition and weightings of the stocks held by the ETF closely corresponds to those of the underlying index.

ETF units are traded on the stock exchange (i.e. the secondary market), while the creation and redemption of ETF units can usually only be made through participating dealers (i.e. the primary market), but these kind of transactions are normally made in large, pre-defined blocks of units. New units of an ETF are created when participating dealers, deliver a creation basket of constituent stocks of the underlying index and a cash component (for rounding adjustment, accrued dividend etc.) to the fund manager of ETF. On the other hand, on redemption of ETF units participating dealers can obtain from the ETF the constituent stocks of the underlying index and a cash component when they present a prescribed number of ETF units to the fund manager of ETF.

The market prices of ETF units are largely based on the net asset value ("NAV") per unit of the ETF. However, as ETF units are traded on the stock exchange, their market prices may, due to the forces of supply and demand, diverge from their NAV per unit. With the presence of the creation and redemption mechanism, the divergence should be minimal under normal situations.

Similarities:

Differences:

DIVERSIFICATION

An ETF represents an investment portfolio, which provides diversification across many shares through a single investment.

GLOBAL EXPOSURE

Some ETFs invest in a pool of overseas securities, offering investors exposure to a foreign market.

TRADES LIKE A SHARE

ETF units are traded like shares listed on a stock exchange, and are tradable anytime during the trading hours of the stock exchange. Moreover, market makers may be designated to promote the liquidity of ETF units.

LOW TRANSACTION COSTS

Generally, ETFs have lower transaction costs than traditional open-ended investment funds. The transaction costs of trading an ETF are similar to those of trading stocks, including brokerage and other relevant fees and expenses payable for dealing on the stock exchange.

HIGH TRANSPARENCY REGARDING INFORMATION DISSEMINATION

Since ETFs are exchange-listed instruments, they have to comply with the information disclosure requirements of the relevant stock exchanges. The level of the index and the constituent stocks which make up the index are publicly available information that investors can easily access. Price quotations of ETF Units for potential buyers and sellers are disseminated continuously during exchange trading hours.

LOWER INVESTMENT AMOUNT

The amount required for investment in one board lot of ETF Units is generally lower than the amount of minimum investment required for a traditional open-ended investment fund.

1. Trading

Investors who have a view on the general direction of a stock market and at the same time want to reduce risk of concentration on any particular stock can choose to trade ETFs. If they are optimistic about the market, they can buy ETF units. In contrast, they can, subject to applicable laws, rules and regulations short sell ETF units in case they have a pessimistic view about the market provided they have already made an agreed arrangement with their brokers.

2. Hedging

ETF can be used as a hedging instrument. If investors hold a portfolio of stocks and they want to hedge against the risk of a market downturn, they can, subject to applicable laws, rules and regulations, short sell ETF units to hedge the risks posed by falling prices of that portfolio of stocks in case of the market downturn.

3. Arbitrage

Sophisticated investors can take advantage of the arbitrage opportunities posed by the differentiation in market prices among the ETF Units, constituent stocks of the underlying index and related derivatives contract (if available). Taking the TraHK as an example, such investors can try to find arbitrage opportunities posed by the differentiation in market prices among TraHK, constituent stocks of the Hang Seng Index and Hang Seng Index Futures contract.

You can invest in an ETF by simply opening an account with an authorised stock broker and invest in an ETF just like purchasing and holding listed securities.

If you intend to invest a substantial amount in an ETF, you may contact one of the ETF's Participating Dealers (PD). The PD can help you to create ETF units through an "In-kind Creation" arrangement with the ETF's fund manager, with applicable transaction fees and brokerage commission agreed upon between you and the PD.

It depends on the dividend distribution policy of the relevant ETF. Generally speaking, most ETFs pay dividends on a regular basis to investors.

The risks of investing in ETFs include but are not limited to the following points:

In general, you should consider if investment in ETFs is a suitable investment for you in terms of your own circumstances and financial position, your investment objective and your risk appetite. You should read in detail the offering documents of the relevant ETF and consider all the risks of investing in the relevant ETF. Please note that prices of units in the ETF and the income from them can fall as well as rise and you may suffer a capital loss in your investment in the relevant ETF. In addition, you should avoid excessive investment in any single type of investment (in terms of its proportion of your overall investment portfolio) including any proposed investment in the relevant ETF so as to avoid your investment portfolio being over-exposed to any particular investment risk.

You can buy or sell Units in Hang Seng's ETF(s) through your broker or bank securities account anytime during trading hours of the Stock Exchange of Hong Kong Limited (the "SEHK"). The stock code of HS FXI25 ETF is 2838 with 100 Units per board lot, that of HSI ETF is 2833 with 100 Units per board lot, and that of HS H-Share ETF is 2828 with 200 Units per board lot. The transaction costs in respect of dealing in Units in Hang Seng's ETF(s) are listed below for reference. Please refer to the Hong Kong Offering Document of the individual ETF for details.

* Stamp duty is HK$1 for every HK$1,000 of transaction amount or part thereof

It is expected that the market price of Units in Hang Seng's ETF(s) will normally approximate its net asset value (NAV) per Unit. However, due to the forces of market supply and demand, market prices of Units in Hang Seng's ETF(s) may differ from the NAV per Unit of the relevant Hang Seng's ETF, which is calculated by adding the market value of stocks it holds, cash, and other assets of the relevant Hang Seng's ETF, subtracting its liabilities, and dividing the result by the number of Units outstanding.

Before deciding whether or not to invest in a Hang Seng's ETF, you should consider your own circumstances, financial position, investment objective, investment experience and risk appetite to see if investment in the relevant Hang Seng's ETF is suitable for you. Please note that prices of Units in the relevant Hang Seng's ETF and the income from them can fall as well as rise and you may suffer a capital loss in your investment in the relevant Hang Seng's ETF. In addition, you should avoid excessive investment in any single type of investment (in terms of its proportion of your overall portfolio) including any proposed investment in the relevant Hang Seng's ETF so as to avoid having your investment portfolio being over-exposed to any particular investment risk. You should read in detail the Hong Kong Offering Document of the relevant Hang Seng's ETF and consider all the risks involved. Generally speaking, such risks include but are not limited to:

In relation to the HS H-Share ETF and the HS FXI25 ETF, investors should note that in tracking the relevant Indexes, these two Hang Seng's ETFs will be investing in the constituent stocks of the relevant Indexes with reference to their respective weightings in those Indexes. Certain constituent stocks of the relevant Indexes are shares of mainland Chinese companies which have substantial business exposure to growth opportunities in mainland China. Thus, investors in such Hang Seng's ETFs are subject to the risks of investing in emerging markets generally and in particular, all risks specific to investments associated with the China market.

Investors trading via the SEHK will have to pay transaction costs as set out in the section "How can I buy or sell Units in Hang Seng's ETF(s)?". Currently, all Hang Seng ETFs will pay management fee and trustee fee to the Manager and the Trustee respectively. Investors should refer to the Hong Kong Offering Document of the relevant Hang Seng's ETF for full details of the relevant fees, charges and expenses. Investors should also note that fee may change and they should check for, from time to time, the information with respect to the relevant Hang Seng's ETF (including any change in fees) at the Notice to Unitholders section of this web site.

The Manager primarily to adopt a replication strategy to achieve the investment objective of the HSI ETF. When there is a change in the constituent stock(s) of the Hang Seng Index or their weightings in it, the Manager will be responsible for implementing any adjustment to the ETF's portfolio of stocks to ensure that the composition and weighting of Index Shares held by the HSI ETF closely correspond to that of the constituent stocks of the index.

The Manager intends to adopt a replication strategy to achieve the investment objective of the HS H-Share ETF. When there is a change in the constituent stock(s) of the H-Share Index or their weightings in it, the Manager will be responsible for implementing any adjustment to the ETF's portfolio of stocks to ensure that the composition and weighting of Index Shares held by the HS H-Share ETF closely correspond to that of the H-Share Index's constituent stocks.

The Manager primarily to adopt a replication strategy to achieve the investment objective of the HS FXI25 ETF. When there is a change in the constituent stock(s) of the FTSE/Xinhua China25 Index or their weightings in it, the Manager will be responsible for implementing any adjustment to the ETF's portfolio of stocks to ensure that the composition and weighting of Index Shares held by the HS FXI25 ETF closely correspond to that of the FTSE/Xinhua China25 Index's constituent stocks.

You will only be able to redeem your Units in return for Hang Seng Index's constituent stocks if you hold a minimum of 50,000 Units. Such in-kind redemption can be dealt with through Participating Dealers. For details, please refer to the Hong Kong Offering Document of HSI ETF.

You will only be able to redeem your Units in return for H-Share Index's constituent stocks if you hold a minimum of 100,000 Units. Such in-kind redemption can be dealt with through Participating Dealers. For details, please refer to the Hong Kong Offering Document of HS H-Share ETF.

You will only be able to redeem your Units in return for FTSE/Xinhua China 25 Index's constituent stocks if you hold a minimum of 50,000 Units. Such in-kind redemption can be dealt with through Participating Dealers. For details, please refer to the Hong Kong Offering Document of HS FXI25 ETF.

Real-time trading information of Hang Seng's ETFs will be available on the teletext screen of SEHK. Real-time updates about the related Indexes can be obtained through Reuters, Bloomberg, Moneyline Telerate and on www.hsi.com.hk and www.ftsexinhua.com (as the case may be). Investors are advised to actively check the information on the relevant Hang Seng's ETF on a regular basis at this web site since information may materially impact on their investment holdings. The Manager may not issue any separate notice or newspaper notice regarding changes of the relevant Hang Seng's ETF.