Precious metal ETF
- A precious metal ETF is a passive investment vehicle which holds physical bullion of a specific precious metal with an aim to track the price of that precious metal (net of the fund's on-going expenses).
- Like other ETFs, a precious metal ETF is traded on the stock exchange and its trading price may not be equal to its net asset value.
The information in the following FAQs is applicable to SFC-authorized precious metal ETFs which include gold ETFs, silver ETFs and platinum ETFs.
What are precious metal ETFs and what are their key features?
Precious metal ETFs, (ie, gold ETFs, silver ETFs and platinum ETFs) are passive investment vehicles which primarily hold physical bullion of a specific precious metal (ie, gold bullion for gold ETF, silver bullion for silver ETF and platinum bullion for platinum ETF) with an aim to track the price of that precious metal (net of the fund's on-going expenses).
Precious metal ETFs offer investors a means of participating in the precious metal markets through trading of the ETF units listed on the stock exchange, and without the necessity of taking physical delivery of the precious metal bullion.
What does a precious metal ETF hold in its portfolio?
A precious metal ETF holds physical bullion of a specific precious metal in its portfolio as its major underlying asset, which is held in trust in the vault of the custodian or the sub-custodian.
Can I take physical possession of the precious metal bullion with equivalent value rather than cash proceeds upon selling the units?
Generally speaking, a retail investor will only receive cash proceeds upon selling the units in a precious metal ETF. Only participants authorised by a precious metal ETF may redeem physical metal bullion directly from that precious metal ETF.
How are precious metals priced?
The spot prices for precious metals are determined by market forces in the 24-hour global over-the-counter (OTC) market for precious metals. The OTC market accounts for most global metal trading, and prices quoted reflect the information available to the market at any given time.
The London gold, silver and platinum fixes are respectively one of the most widely used benchmarks for daily gold, silver and platinum prices and long-term contracts, and are quoted by various financial information sources. There are two daily fixings for gold and platinum and one for silver.
The London gold, silver and platinum fixing takes place by telephone every day on which members of the relevant fixing are open for dealing in London. The fixing for each precious metal should be the price at which all buying and selling orders declared by members of the fixing can be matched, and it is the responsibility of the chairman of the fixing to determine when this occurs. Once the fixing price is declared, all orders are executed based on that price. The London gold, silver and platinum fixes provide reference to gold, silver and platinum prices respectively for that day's trading and market participants will usually refer to one of them as basis of valuation. The following table summarises the different London fixing times for different precious metals:
Gold Silver Platinum Fixing times (approximate) in London, England time 10:30 12:00 09:45 15:00 N/A 14:00
If you wish to find out the relevant benchmark that a precious metal ETF aims to track, refer to the offering document for details.
What factors will affect the prices of precious metals?
The prices of precious metals are influenced by the market supply and demand. Also, similar to any other financial instrument, the prices of precious metals are subject to the happenings in the financial market in other sectors as well as the prevailing political incidents such as wars, terror attacks or economic incidents, such as inflation, cross-exchange rates of the US dollar in relation to other currencies, etc.
What are the benefits and risks associated with investing in precious metal ETFs?
Precious metal ETFs provide a simple, transparent, cost-effective and an easily accessible investment means to gain exposure to the relevant precious metal markets. However, investing in precious metal ETFs are subject to investment and other risks including:
- Market concentration/high volatility risk - The prices of precious metals are highly volatile and may fluctuate widely and may be affected by market supply and demand as well as the effects of any economic, market or political occurrences. As the precious metal ETF primarily invests in a single type of precious metal, it is more susceptible to the effects of such price volatility than a more diversified mutual fund or unit trust which invests in a portfolio of securities. There is no guarantee that the precious metal price will always appreciate.
- Custody risk - Custodian of a precious metal ETF may not maintain insurance which provides full coverage for the precious metal bullion under its custody. Investors could suffer a loss if the precious metal bullion held under custody is stolen, lost or damaged.
- Trading risk - Like other typical ETFs, the unit of a precious metal ETF may trade at a price which is at, above or below the net asset value per unit due to secondary market factors such as demand and supply.
- Tracking error - The return of a precious metal ETF may deviate from the price of metal it aims to track due to factors such as fees and expenses and rounding of the metal price.
- Passive investment risk - Precious metal ETFs invests primarily in a single type of precious metal and is not actively managed. Since the fund manager will not take defensive positions in declining markets, the ETF may suffer loss in value if there is a decline in the price of precious metal.
- Liquidity risk - Although the precious metal ETFs can be traded on the Stock Exchange of Hong Kong (SEHK), investors may not be able to find other buyers if the funds are not widely held. Low liquidity may also affect trading efficiency and the trading price.
- Benchmark risk - While the London gold, silver and platinum fixes are widely accepted as the basis for pricing spot transactions as well as a variety of other transactions, the fixing process is not subject to regulatory oversight. The London gold, silver and platinum fixes do not purport to set a definitive price for the relevant precious metals at which all orders for sale or purchase for the relevant precious metals will take place on that particular day or time. There is no guarantee that the prices fixed reflect the fair value of the precious metals.
Moreover, specific precious metal ETFs may also be subject to additional risks set out below:
- Gold ETFs
Official sector risk
The official sector (e.g. central banks, governmental agencies and multi-lateral institutions) holds a significant amount of gold that is not mobilised in the open market. If the official sector sells their gold all at once or in an uncoordinated manner, the sudden increase in supply of gold to the market might outweigh demand and adversely affect the price of gold ETFs.
- Silver ETFs
Higher volatility risk
Silver is exposed to movements in both the investment markets and industrial markets as it is both used by investors to hedge against inflation or foreign exchange risks, and largely used for industrial purposes. The price of silver ETFs may be more volatile than gold ETFs or platinum ETFs.
Industrial demand risk
A relatively high proportion of overall demand of silver is made up of industrial usages. This may cause its price to fluctuate differently to other precious metals, such as gold, for which a larger proportion of overall demand is for investment purposes.
- Platinum ETFs
Risk relating to disruption to supply/production
Platinum is produced by significantly fewer countries than gold and silver, with South Africa and Russia being the main producer countries. These countries are emerging markets and therefore are exposed to greater risk of a disruption to production than established markets. For example, global or regional political, economic or financial events and situations, particularly war, terrorism, expropriation and other activities which might lead to disruptions to supply from these emerging market countries that are major producer countries of platinum. If there is a shortage of physical platinum, this could cause a significant adverse impact on liquidity in the underlying platinum market and therefore on the price of platinum ETFs. The bid-offer spread for platinum ETFs may also widen. In the worse case, creation in the primary market and trading in the secondary market may be suspended.
What factors should I consider before investing in precious metal ETFs?
You are always advised to read the offering document to understand the specific features and risks involved and find out information about the precious metal markets, channels through which trading information of the precious metal ETFs will be disclosed as well as the fees and charges to be borne by you before investing.
You should then assess whether the product is suitable for you in light of your investment objectives, the amount of money required to make the investment and your risk appetite.
Where can I buy or sell precious metal ETFs? What fees do I need to pay?
You can buy or sell units of precious metal ETFs on SEHK based on the trading price via brokerages licensed by or banks registered with the SFC to carry on a business of dealing in securities. Similar to buying and selling stocks, you need to pay brokerage commission, SFC transaction levy, SEHK trading tariff and trading fee. Your investments are also subject to fees and charges charged by the manager, trustee and the custodian of the precious metal ETFs. For details please refer to the relevant offering document.
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