Exchange Traded Funds. Reasons to Consider. For professional clients only

Transcription

1 Exchange Traded Funds Reasons to Consider For professional clients only

2 Exchange Traded Funds (ETFs) have been designed to provide low-cost and transparent access to the world s markets, combining the simple tradability of a share with the diversified market access of a fund. This document sets out some of the main reasons to consider adding ETFs to client portfolios and also discusses some of the key features of HSBC Global Asset Management s range of developed and emerging markets equity ETFs.

3 What can ETFs add to your client portfolios? 1 2 Straightforward ETFs have a simple proposition: ETFs seek to track the performance of an index as closely as possible. Therefore, ETFs do not have an added expense of maintaining teams of dedicated fund managers and stock analysts whose primary objective is to look into future performance prospects of single companies. Instead, their portfolio selection process is based largely on a quantitative, computer-based process. The use of systematic quantitative approach also ensures that both trading costs and tracking error are kept to a minimum. Many ETFs track popular global indices, which clients will know and recognise. Index tracking itself is a widely accepted investment approach, which has been developed over the past 25 years. As such, for clients who may otherwise choose to invest in stock markets via other investment vehicles (such as unit trusts/oeics), ETFs can offer a more straightforward way to invest, especially as they can be bought and sold continuously throughout the day on the stock exchange, like a share. Diversified ETFs offer exposure to an entire index via the purchase of one share. From the outset, therefore, an ETF investment is by definition more diversified than buying a share in a single company. ETFs can add further diversification to client portfolios due to the fact that there is now a wide range of ETFs available, offering market exposure to many different countries/regions and sectors around the world. This feature can help clients construct globallydiverse portfolios, thereby significantly reducing stockspecific risk. 4 5 ETF asset managers rebalance the ETF as its underlying index, implement any required corporate actions and manage dividend payments, removing the need to manage a range of individual client portfolios actively in order to ensure the close tracking of index performance. The fact that investors obtain the potential benefits of full exposure to an entire index via the purchase of one share can make ETFs a more cost-effective investment solution than buying all of the shares in that index individually. Flexible ETFs are very flexible; they can be bought and sold intraday on exchange in the same way as a share. This not only means that their prices can be constantly monitored, but it also allows for ETF investments to be bought and sold in a timely fashion, to reflect changing client investment needs. One key advantage of ETFs is that their diverse nature - in particular the various countries/regions and sectors where they can be invested - means that they can be easily used as portfolio building blocks ; either to implement a core strategy of investment in a major equity market (e.g. the US S&P 500 Index) or as satellite investments, in areas such as single country emerging market funds (e.g. China). In the same way, this flexibility in buying and selling means that ETFs can be used as easily for a long-term investment as for a short-term investment. Transparent ETFs are a very transparent investment product. As a result, it is very easy for clients to know what they own. 3 Cost-effective ETFs have historically tended to have lower costs than active funds and other types of mutual funds. The primary cost associated with ETFs is the annual Ongoing Charges Figure (OCF)*. This incorporates elements such as the management fee and a list of other costs carried by the asset manager; these include administration, custody and audit fees, legal, regulatory and registration expenses. Most ETF providers - including HSBC - publish a full list of the securities that they hold on a daily basis. There are also fund fact sheets available that cover areas such as performance and costs. The fee structure of ETFs, as represented by the OCF, is also transparent. Other types of index funds (such as OEICs) may only disclose their holdings on a monthly, quarterly or annual basis (although Top 10 holdings tend to be provided monthly). With this in mind, it can be seen that an ETF investment offers more transparency from this perspective. * As at July Ongoing Charges Figure (OCF): charges taken from the fund over a year. This figure excludes transaction costs. Reasons to consider ETFs 3

4 What can ETFs add to your client portfolios? (cont d) 6 A liquid product that can provide access to hard-to-reach market areas ETFs can be very liquid investment products, with this liquidity derived from the liquidity of the underlying shares within the index being tracked by the ETF. This means that, for ETFs based on developed world markets in particular, it is relatively easy to enter and exit positions, with these ETFs generally having a lower bid/offer spread, reflecting the easy access to the underlying stocks and the higher supply and demand for shares within the ETF. However, it must also be stated that there are less liquid ETFs as well, especially those ETFs that are based on less liquid equity indices. One additional feature of ETFs is the fact that shares can be created at any time via a process known as creation/redemption in the Primary Market (where shares are created and redeemed in return for baskets of securities or cash without a meaningful impact on the underlying market). This process acts as an additional layer of liquidity. As well as their liquidity, ETFs can also offer a simple and cost-effective way of accessing harder-to-reach market areas, such as Global Emerging Markets. This is an area where we believe that HSBC s range of equity ETFs has a particular advantage over funds offered by other ETF providers, which we explain further overleaf. 7 A tax-efficient product ETFs can also represent a tax-efficient investment vehicle, as opposed to company shares. ETFs are exempt from UK stamp duty when purchased via a stock exchange. Most ETFs are also eligible for inclusion in the stocks and shares component of a New Individual Savings Account (NISA)*or Self-Invested Personal Pension (SIPP). * From July all ISAs will become New ISAs (NISAs). This applies to all existing ISAs and new accounts opened after 1 July. The Government has changed the name to reflect the significantly increased limits and flexibility that will be available to account holders. The NISA offers flexibility to save an annual allowance of 15,000 in cash, stocks and shares or any combination of the two. Under the NISA rules, investors are also able to transfer previous years ISA savings freely between stocks and shares and cash. 4 Reasons to consider ETFs

5 HSBC s range of equity ETFs has been designed with the client in mind. To that end, HSBC has used its global footprint to create a range of ETFs across both developed and emerging market equity indices that provide exposures to the markets where our clients are looking to invest.

6 Why consider HSBC ETFs? 1 2 Market Access HSBC offers a wide range of ETFs across both developed and emerging markets, providing ample opportunities for portfolio diversification. Overall, HSBC s range of equity ETFs has a slight bias towards Global Emerging Markets (15 out of 28 funds). Emerging markets are accounting for a rising share of international equity markets and consequently are increasingly playing a growing role in asset allocation within global investment portfolios. HSBC has a long track record in emerging market investment and we can subsequently offer direct market access on many local stock exchanges. We were the first provider in Europe to offer investors a physically replicated Russian ETF investing in local Russian stocks. Moreover, we believe, the tracking error and tracking difference across our range of Emerging markets ETFs is very competitive, compared to both physical and synthetic Funds. The Security of Physically-Replicated Funds HSBC only offers physically replicated ETFs. We believe that the physically replicated approach allows for greater transparency within the product. Our investment approach is primarily based on full replication (i.e. owning all of the shares in the underlying index) for 23 out of our 28 equity funds, with the remaining 5 funds using a technique known as optimisation (i.e. where we own a proportion of shares in the underlying index, as it is not cost-effective or feasible to buy all of the shares). There is an alternative ETF investment approach, known as synthetic (or swap-based) replication. These ETFs use swaps and other derivative products to obtain market access. However, we believe that the risks associated with such ETFs the most important of which is counterparty risk make them a less attractive investment option. 3 4 Spotlight on Performance HSBC compares favourably to its peers in terms of tracking difference and tracking error (two common indicators of ETF performance) across our range of equity ETFs. HSBC s robust quantitative portfolio management and trading processes ensure that HSBC ETFs are able to track their benchmark indices closely. Moreover, our overall investment approach remains conservative. We believe in strong levels of risk management and governance for our range of ETF products, aiming to deliver minimum tracking difference and tracking error at a competitive price to our clients. Proven Track Record HSBC s range of ETFs is managed by HSBC Global Asset Management, a leading global investment manager with a long track record of providing sound investment solutions to a wide range of investors around the world. We have been managing passive investments around the world for over 25 years and started managing ETFs in HSBC started offering ETFs in Europe in We currently offer 28 ETFs in Europe - that cover the main developed and emerging equity markets - with USD5.9bn of assets under management as at the end of August. HSBC s established position in global emerging markets means that we are well positioned to offer ETFs based in these fast-growing areas of the world. HSBC ETFs are all UCITS IV compliant, ISA and SIPP eligible and have UK Reporting Fund status. HSBC s ETFs carry no entry or exit fees. However, as ETFs trade on stock exchanges, they are subject to bidoffer spreads and broker commissions. 6 Reasons to consider ETFs

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. 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 ETFs 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. Traded around Europe HSBC s equity ETFs are listed on the main European exchanges and registered for sale in several more European markets, making it easier for clients to access them. For further information on HSBC s range of ETFs, including up-todate performance information, costs and current holdings, please visit Conclusion HSBC s range of developed market and emerging market equity ETFs offer easy tradability and the ability to provide diversified market access, making them a potentially attractive investment solution. In addition, our equity ETFs offer all of the advantages of physical replication, coupled with a competitive cost structure. Russian risk: There are significant risks inherent in investing in Russia, which could affect the value of investment. These include a lack of clarity in laws and regulations in the following areas: investor protection, banks and other financial services, the Russian economic system, taxation, transaction settlement and fiduciary duty and responsibilities of company management. Performance risk: Past performance is not an indication of future returns. Reasons to consider ETFs 7

8 Contact For more information, please contact us: Telephone: +44 (0) Website: 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 (UK) Limited accepts no responsibility for any errors or omissions contained therein. Any views expressed were held at the time of preparation and are subject to change without notice. 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. 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. 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. 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. The information in this document is based on HSBC s interpretation of current legislation and HM Revenue & Customs practice. While we believe that this interpretation is correct, we cannot guarantee it. Legislation and tax practice may change in the future. Tax treatment is based upon individual client circumstances. 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. Copyright HSBC Global Asset Management (UK) Limited All rights reserved /ED/0315/FP EXP 01/09/2015.