Futures-based ETFs (note 1) are passively-managed index funds traded on an exchange which aim to replicate the performance of an underlying index by investing in futures contracts.
Excess return index and total return index
A futures-based ETF may track a spot market index or a futures index. Typically, a futures index tracked by a futures-based ETF is either an excess return index or a total return index.
- An excess return index measures the changes in the prices of the underlying futures contracts during the period that they are held by the ETF as adjusted by, the gain or loss incurred from rolling the futures contracts as they approach maturity (please refer to risks of rolling futures contracts below).
- A total return index measures the changes in prices of the futures contracts and the gain or loss incurred from rolling the futures contracts, as well as the notional interest earnings from the ETF's cash holding and margin deposits based on various assumptions.
For details about the different types of spot market indices tracked by an ETF, you may refer to the "Key features" of the "ETF basics" section.
Benefits and risks of investing in futures-based ETFs
As one of the different types of ETFs, futures-based ETFs have the key benefits of a typical ETF, such as easy to trade, diversified, transparent and cost-effective.
At the same time, it also benefits from the use of futures contracts in gaining exposure to a wide range of underlying assets including commodities (such as precious metals and other physical commodities), fixed income securities and equities.
However, investing in futures-based ETFs is subject to common risks of ETFs as well as relevant risks involved in futures funds. They include:
Specific risks involved in futures-based ETFs
Risk of rolling futures contracts: Futures contracts are binding agreements that are made through futures exchanges to buy or sell the underlying assets at a specified time in the future. “Rollover” occurs when an existing futures contract is about to expire and is replaced with another futures contract representing the same underlying but with a later expiration date. When rolling futures contracts forward (ie selling near-term futures contracts and then buying longer-term futures contracts) in a situation where the prices of the longer-term futures contract are higher than that of the expiring current-month futures contract, a loss from rolling (ie a negative roll yield) may occur. Under such circumstances, the proceeds from selling the near-term futures contracts will not be sufficient to purchase the same number of futures contracts with a later expiration date which has a higher price. This may adversely affect the NAV of the futures-based ETF.
Risk of statutory restrictions on number of futures contracts being held: There is a statutory position limit restricting the holding of futures contracts traded on the recognised exchange company to no more than a specific number of such futures contracts. If the holding of such futures contracts of a futures-based ETF grows to the limit, this may prevent the creation of units of the ETF due to the inability to acquire further futures contracts. This may lead to differences between the trading price and the NAV of the ETF units listed on the exchange.
- Risk of mandatory measures imposed by relevant parties: Regarding the ETF’s futures positions, relevant parties (such as clearing brokers, execution brokers, participating dealers and stock exchanges) may impose certain mandatory measures for risk management purpose under extreme market circumstances. These measures may include limiting the size and number of the ETF’s futures positions and/or mandatory liquidation of part or all of the ETF’s futures positions without advance notice to the ETF’s manager. In response to such mandatory measures, the ETF manager may have to take corresponding actions in the best interest of the ETF’s investors and in accordance with the ETF’s constitutive documents, including suspension of creation of the ETF’s units and/or secondary market trading, implementing alternative investment and/or hedging strategies and termination of the ETF. These corresponding actions may have an adverse impact on the operation, secondary market trading, index-tracking ability and the NAV of the ETF. While the manager will endeavour to provide advance notice to investors regarding these actions to the extent possible, such advance notice may not be possible in some circumstances.
Identification of futures-based ETF – addition of marker “F” to stock short name
The marker "F" will be placed at the beginning of the English and Chinese stock short names of all futures-based ETFs listed on the SEHK. The marker would make futures-based ETFs more visible on the stock pages of HKEx's securities trading system. By way of example, the stock short name of a futures-based ETF will appear as follows:
F ABC Commodities ETF
Please note that, however, the marker "F" will not appear in the full names of all futures-based ETFs.
As an investor, you should read carefully the offering document including the product key facts statement to fully understand the nature, investment objective and strategy, information about the index, fees and charges, key features and major risks of a futures-based ETF.
You should assess whether the product is suitable for you in light of your investment objectives, the amount of investment required and your risk appetite. Should you have any questions about the product, please consult your intermediaries before making any investment.
1 In this article, a futures-based ETF refers to one which is authorised by the SFC for public offering in Hong Kong pursuant to 8.4A and 8.6 of and Appendix I to the Code on Unit Trusts and Mutual Funds ("UT Code").
2 In this article, a futures and options fund refers to one which is authorised by the SFC for public offering in Hong Kong pursuant to 8.4A of the UT Code.
21 May 2020