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Key Message:

  • An ETF appeals to investors by offering indirect access to markets that restrict accessibility by foreign investors, and provides investors with a return that replicates the index performance, without actually owning the constituents that comprise the index.

An authorised index tracking exchange traded fund (ETF) is a fund authorised by the Securities and Futures Commission (SFC) that is traded on an exchange. Its principal objective is to track, replicate or correspond to the performance of an underlying index. The index can be on a stock market, a specific segment of a stock market or a group of stock markets in a region or elsewhere in the world. It can also be on bonds or commodities.

An ETF gives investors an indirect access to a certain market. By investing in an ETF, investors can receive a return that replicates (although not 100% in most cases) the performance of the index without actually owning the constituents that comprise the index. In some cases, an ETF tracks an index of a market that has restricted access (such as, the China A-share market and the Indian market), thus giving investors indirect access to a market that is not accessible by foreign investors not domiciled in that jurisdiction.