Virtual asset futures ETFs are now listed and traded on the HKEX, offering investors who wish to gain exposure to virtual assets (VA) a listed product option.
As the talk of town, many investors may be interested in investing in VA, such as bitcoin and ether. VA are usually traded on local or overseas platforms, many of which may be unregulated. Incidents of bankruptcy, closure, fraud, default, theft, and hacking are not uncommon for VA trading platforms as evident in the recent fallout of a number of VA trading platforms.
ETFs are investment products regulated by the SFC and traded on HKEX. The virtual asset futures ETFs can provide retail investors who wish to gain exposure to VA a regulated and listed product option.
Investing in VA through ETFs
We can use ETFs to gain exposure to products or markets that are relatively difficult to access. For example, with the Stock Connect, we can directly trade A-shares, as well as A-share ETFs listed in Shanghai, and Shenzhen. Before that, one convenient way to access the A-share market was to trade A-share ETFs listed in Hong Kong. Commodity futures, such as crude oil and iron ore, are also typically beyond the reach of retail investors, and they can only gain exposure through commodity futures ETFs. Therefore, virtual asset futures ETFs and commodity futures ETFs are similar in this regard.
Like other ETFs, virtual asset futures ETFs are listed and traded on HKEX. Their issuers are required to meet the regulatory requirements stated by the SFC to protect investors, which include additional requirements on the ETF’s management company, eligible futures, investment strategies, and product disclosure. Today, the VA product spectrum is broad and includes a wide variety of virtual assets. In this regard, at the initial stage, virtual asset futures ETFs listed in Hong Kong can only invest in bitcoin and ether futures traded on the Chicago Mercantile Exchange.
Are virtual asset futures ETFs suitable for retail investors?
Historically, bitcoin and other virtual assets have experienced extreme price volatility and are highly risky. Even when they are combined with ETFs, this nature will not change. Since virtual asset futures ETFs provide the performance of the underlying VA futures, the significant price fluctuations or total loss of value of the underlying VA futures may have an adverse impact on the price of the relevant ETFs. In addition, although the risks related to the underlying spot VA, such as custody, trading platforms, manipulation, and frauds may not cause direct losses to virtual asset futures ETFs, they may still affect the value of virtual asset futures ETFs unfavorably. Investors should also be aware of risks associated with futures-based ETFs, such as the potential high costs incurred from rolling over futures contracts and operational risks related to VA futures. We should refer to the ETF’s “product key facts statement” to learn more about the risks.
If you do not fully understand the risks associated with virtual asset futures ETFs or cannot bear the potential significant or total losses in your investment in virtual asset futures ETFs, you should not make an investment.
General investors may access some VA-related exchange traded products listed on overseas exchanges. These products may also be risky and may invest in VA other than bitcoin and ether. However, these products and their offering documents are not reviewed and authorized by the SFC. Investors will have no protection under the SFO in terms of product structure, features and documentation.
VA are complicated, and the structure and mechanism of futures-based ETFs are difficult to understand too. If you, like me, don't know much about these areas, it’s better to find out more about their nature and risks before making an investment decision. As virtual asset futures ETFs have high price volatility, they should not be the main investment in our investment portfolio. If you decide to invest in a virtual asset futures ETF, you should be prepared to lose your entire investment in the product.
