The ETF market in Hong Kong is relatively young, with the first exchange-traded fund approved for listing by the Securities and Futures Commission only in 2000. However, since then, ETFs had experienced rapid growth, especially after 2009 when mainland China liberalised its ETF market.
As of December 2014, there are just under 200 funds listed on the Stock Exchange of Hong Kong, according to ETF Database (a global website that provides data on exchange-traded products).
What are Exchange-traded Products?
An exchange-traded product is a security that tracks an index or other asset class but trades like a stock on an exchange. Such products are attractive to sophisticated investors because they provide easy access to diversified exposure to specific assets without purchasing those assets directly, usually done by buying shares in a mutual fund.
Exchange-traded products are typically not as tax-efficient as traditional mutual funds. Still, they offer advantages over directly holding the underlying asset(s), such as diversification and greater liquidity.
An exchange-traded product (ETP) tracks an index or other asset class but trades on exchanges like a stock. These open-ended securities may track benchmarks of stocks, bonds, commodities, currencies, options, futures and other derivatives. Some ETFs invest in commodities or commodity indices that don’t involve the delivery of any actual commodity to the buyer; instead, the buyer takes their chances in fluctuations in price at the settlement date.
Advantages in Trading in ETFs
ETF s can be attractive to sophisticated investors because they provide easy access to diversified exposure to specific assets without directly purchasing the underlying asset(s). For example, suppose an investor wanted to invest in the American technology sector. They could buy shares in a mutual fund that invests exclusively in American technology companies, giving them very concentrated exposure. Alternatively, they could purchase an ETF that tracks the NASDAQ-100 Index, which would provide them with exposure to 100 different American technology companies.
Exchange-traded products are not as tax-efficient as traditional mutual funds but offer advantages over directly holding the underlying assets. These include diversification and greater liquidity. Another benefit is that investors can trade ETPs throughout the day on an exchange, while mutual funds can only be traded at the end of the trading day at the fund’s Net Asset Value (NAV).
The ETF Settlement Process in Hong Kong
ETFs are traded on several global exchanges, each with its settlement policies. The ETF issuer itself has no control over the length of time required for a transaction to settle. This all depends on how long it takes for the DVP (Delivery versus Payment) process, also known as ‘T+3’, to take place at the brokerage firm where your trade took place.
Once you have placed an order with your brokerage firm, it will send your instruction electronically to its counterparty – another brokerage firm – by way of a broker-to-broker messaging system. Your order is then matched against other pending orders within that same trading venue. Once that match occurs, the settlement must follow suit accordingly after T+3 day(s). The buyers must receive the underlying securities, and the sellers must receive the cash proceeds from the sale.
However, it’s important to note some exceptions to this rule. For example, if you purchase an ETF through a market maker, settlement can occur the same day instead of placing an order with a brokerage firm. This is because market makers are subject to different rules and procedures.
Another thing worth mentioning is that not all ETFs settle on T+3. Depending on the jurisdiction and listing venue, some ETFs may have a longer or shorter settlement period. In Hong Kong, for instance, most ETFs settle within four days of the trade date.
If you’re still unsure how ETF settlements work or have any other questions about investing in this security type, please don’t hesitate to contact a reputable online broker from Saxo Bank and start trading on a demo account before investing your own money in ETFs, options, or any other instruments.