An ETP is structured as a mutual fund or a unit trust but its units, like stock, are tradable on global Stock Exchanges.
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ETP appeals to investors by offering indirect access to markets that restrict accessibility by foreign investors and provides investors with a return that replicates index performances, without actually owning the constituents that comprise the index. ETPs have in recent years grown in prominence as an investment vehicle, mainly due to its lower costs. With increasing product depth, investors can invest not just in different geographical regions such as Asia, Emerging Markets, Latin America, but they can also have access to sectors and themes such as healthcare, technology and infrastructure.
Key features of ETPs?
To achieve index tracking objective, a fund manager may adopt one or more of the following strategies:
Full replication by investing in a portfolio of securities that replicates the composition of the underlying index;
representative sampling by investing in a portfolio of securities featuring a high correlation with the underlying index, but is not exactly the same as those in the index; or synthetic replication through the use of financial derivative instruments to replicate the index performance.
Trading Price vs. Net Asset Value (NAV)
Each ETF has an NAV that is calculated with reference to the market value of the investments held by it. However, the trading price of an ETP on the SEHK, like that of a stock, is also determined by the supply and demand of the market. The trading price of an ETP may not therefore be equal to its NAV, and this disparity may give rise to arbitraging opportunities.
An ETP may or may not distribute dividends, depending on its dividend policy.
Fees and charges
An ETP incurs certain fees and expenses such as management fees charged by the ETP manager and other administrative costs. These fees and expenses will be deducted from the ETP’s assets and the NAV will be reduced accordingly. Like stocks, trading ETPs on the SEHK incurs transaction costs such as stamp duty, transaction levy and brokerage commission. in the event of liquidation, preferred shareholders are paid off before the common shareholder (but still after debt holders). Preferred stock may also be callable, meaning that the company has the option to purchase the shares from shareholders at anytime for any reason (usually for a premium).
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