For professional clients only

Exchange Traded FundsReasons to Consider

Exchange Traded Funds (ETFs) have been designed to provide low-cost and

transparent access to the world’s markets, combining the simple tradability of a share with the diversified market access of a fund.

This document sets out some of the main reasons to consider adding ETFs to client

portfolios and also discusses some of the key features of HSBC Global Asset Management’s range of developed and

emerging markets equity ETFs.

Reasons to consider ETFs 3

1 Straightforward

ETFs have a simple proposition: ETFs seek to track

the performance of an index as closely as possible.

Therefore, ETFs do not have an added expense of

maintaining teams of dedicated fund managers and

stock analysts whose primary objective is to look into

future performance prospects of single companies.

Instead, their portfolio selection process is based largely

on a quantitative, computer-based process. The use of

systematic quantitative approach also ensures that both

trading costs and tracking error are kept to a minimum.

Many ETFs track popular global indices, which clients

will know and recognise. Index tracking itself is a

widely accepted investment approach, which has been

developed over the past 25 years.

As such, for clients who may otherwise choose to

invest in stock markets via other investment vehicles

(such as unit trusts/OEICs), ETFs can offer a more

straightforward way to invest, especially as they can be

bought and sold continuously throughout the day on the

stock exchange, like a share.

2 Diversified

ETFs offer exposure to an entire index via the purchase

of one share. From the outset, therefore, an ETF

investment is by definition more diversified than buying

a share in a single company.

ETFs can add further diversification to client portfolios

due to the fact that there is now a wide range of

ETFs available, offering market exposure to many

different countries/regions and sectors around the

world. This feature can help clients construct globally-

diverse portfolios, thereby significantly reducing stock-

specific risk.

3 Cost-effective

ETFs have historically tended to have lower costs

than active funds and other types of mutual funds.

The primary cost associated with ETFs is the annual

Ongoing Charges Figure (OCF)*. This incorporates

elements such as the management fee and a list of

other costs carried by the asset manager; these include

administration, custody and audit fees, legal, regulatory

and registration expenses.

ETF asset managers rebalance the ETF as its underlying

index, implement any required corporate actions and

manage dividend payments, removing the need to

manage a range of individual client portfolios actively in

order to ensure the close tracking of index performance.

The fact that investors obtain the potential benefits

of full exposure to an entire index via the purchase

of one share can make ETFs a more cost-effective

investment solution than buying all of the shares in

that index individually.

4 Flexible

ETFs are very flexible; they can be bought and sold

intraday on exchange in the same way as a share. This

not only means that their prices can be constantly

monitored, but it also allows for ETF investments to be

bought and sold in a timely fashion, to reflect changing

client investment needs.

One key advantage of ETFs is that their diverse nature

- in particular the various countries/regions and sectors

where they can be invested - means that they can

be easily used as portfolio ‘building blocks’; either to

implement a core strategy of investment in a major

equity market (e.g. the US S&P 500 Index) or as

satellite investments, in areas such as single country

emerging market funds (e.g. China).

In the same way, this flexibility in buying and selling

means that ETFs can be used as easily for a long-term

investment as for a short-term investment.

5 Transparent

ETFs are a very transparent investment product.

As a result, it is very easy for clients to ‘know what

they own’.

Most ETF providers - including HSBC - publish a full list

of the securities that they hold on a daily basis. There

are also fund fact sheets available that cover areas such

as performance and costs. The fee structure of ETFs, as

represented by the OCF, is also transparent.

Other types of index funds (such as OEICs) may only

disclose their holdings on a monthly, quarterly or annual

basis (although Top 10 holdings tend to be provided

monthly). With this in mind, it can be seen that an

ETF investment offers more transparency from this

perspective.

What can ETFs add to your client portfolios?

* As at September 2015. Ongoing Charges Figure (OCF): charges taken from the fund over a year. This figure excludes transaction costs.

4 Reasons to consider ETFs

6 A liquid product that can provide access to

hard-to-reach market areas

ETFs can be very liquid investment products, with this

liquidity derived from the liquidity of the underlying

shares within the index being tracked by the ETF.

This means that, for ETFs based on developed world

markets in particular, it is relatively easy to enter and

exit positions, with these ETFs generally having a lower

bid/offer spread, reflecting the easy access to the

underlying stocks and the higher supply and demand for

shares within the ETF. However, it must also be stated

that there are less liquid ETFs as well, especially those

ETFs that are based on less liquid equity indices.

One additional feature of ETFs is the fact that shares

can be created at any time via a process known as

creation/redemption in the Primary Market (where

shares are created and redeemed in return for baskets

of securities or cash without a meaningful impact

on the underlying market). This process acts as an

additional layer of liquidity.

As well as their liquidity, ETFs can also offer a simple

and cost-effective way of accessing harder-to-reach

market areas, such as Global Emerging Markets. This is

an area where we believe that HSBC’s range of equity

ETFs has a particular advantage over funds offered by

other ETF providers, which we explain further overleaf.

7 A tax-efficient product

ETFs can also represent a tax-efficient investment

vehicle, as opposed to company shares. ETFs are

exempt from UK stamp duty when purchased via a

stock exchange. Most ETFs are also eligible for inclusion

in the stocks and shares component of a New Individual

Savings Account (NISA) or Self-Invested Personal

Pension (SIPP).

What can ETFs add to your client portfolios? (cont’d)

HSBC’s range of equity ETFs has been designed with the client in mind. To that end, HSBC has used its global footprint to create a range of ETFs across both

developed and emerging market equity indices that provide exposures to the markets where our clients are looking

to invest.

6 Reasons to consider ETFs

1 Market Access

HSBC offers a wide range of ETFs across both

developed and emerging markets, providing ample

opportunities for portfolio diversification. Overall,

HSBC’s range of equity ETFs has a slight bias towards

Global Emerging Markets (15 out of 28 funds).

Emerging markets are accounting for a rising share

of international equity markets and consequently are

increasingly playing a growing role in asset allocation

within global investment portfolios.

HSBC has a long track record in emerging market

investment and we can subsequently offer direct

market access on many local stock exchanges. We

were the first provider in Europe to offer investors a

physically replicated Russian ETF investing in local

Russian stocks.

Moreover, we believe, the tracking error and tracking

difference across our range of Emerging markets ETFs

is very competitive, compared to both physical and

synthetic Funds.

2 The Security of Physically-Replicated Funds

HSBC only offers physically replicated ETFs. We believe

that the physically replicated approach allows for greater

transparency within the product.

Our investment approach is primarily based on

full replication (i.e. owning all of the shares in the

underlying index) for 23 out of our 28 equity funds,

with the remaining 5 funds using a technique known as

optimisation (i.e. where we own a proportion of shares

in the underlying index, as it is not cost-effective or

feasible to buy all of the shares).

There is an alternative ETF investment approach, known

as synthetic (or swap-based) replication. These ETFs

use swaps and other derivative products to obtain

market access. However, we believe that the risks

associated with such ETFs – the most important of

which is counterparty risk – make them a less attractive

investment option.

3 Spotlight on Performance

HSBC compares favourably to its peers in terms of

tracking difference and tracking error (two common

indicators of ETF performance) across our range of

equity ETFs.

HSBC’s robust quantitative portfolio management and

trading processes ensure that HSBC ETFs are able to

track their benchmark indices closely. Moreover, our

overall investment approach remains conservative.

We believe in strong levels of risk management and

governance for our range of ETF products, aiming to

deliver minimum tracking difference and tracking error

at a competitive price to our clients.

4 Proven Track Record

HSBC’s range of ETFs is managed by HSBC Global

Asset Management, a leading global investment

manager with a long track record of providing sound

investment solutions to a wide range of investors

around the world. We have been managing passive

investments around the world for over 25 years and

started managing ETFs in 2003.

HSBC started offering ETFs in Europe in 2009. We

currently offer 28 ETFs in Europe - that cover the

main developed and emerging equity markets - with

USD5.9bn of assets under management as at the end

of August.

HSBC’s established position in global emerging markets

means that we are well positioned to offer ETFs based

in these fast-growing areas of the world.

HSBC ETFs are all UCITS IV compliant, ISA and SIPP

eligible and have UK Reporting Fund status.

HSBC’s ETFs carry no entry or exit fees. However, as

ETFs trade on stock exchanges, they are subject to bid-

offer spreads and broker commissions.

Why consider HSBC ETFs?

Reasons to consider ETFs 7

Market risk:

The value of investments and any income from them can go

down as well as up, and investors may not get back the amount

originally invested.

Currency risk:

Where overseas investments are held, the rate of currency

exchange may cause the value of such investments to go down

as well as up.

Emerging market risk:

Investments in emerging markets are by their nature higher

risk and potentially more volatile than those inherent in some

established markets.

Geographic risk:

Some of the ETFs invest predominantly in one geographic area;

therefore any decline in the economy of this area may affect the

prices and value of the underlying assets.

Russian risk:

There are significant risks inherent in investing in Russia, which

could affect the value of investment. These include a lack of

clarity in laws and regulations in the following areas: investor

protection, banks and other financial services, the Russian

economic system, taxation, transaction settlement and fiduciary

duty and responsibilities of company management.

Performance risk:

Past performance is not an indication of future returns.

Key Risks

Traded around Europe HSBC’s equity ETFs are listed on the main European exchanges

and registered for sale in several more European markets,

making it easier for clients to access them.

For further information on HSBC’s range of ETFs, including up-to-

date performance information, costs and current holdings, please

visit www.etf.hsbc.com.

ConclusionHSBC’s range of developed market and emerging market equity

ETFs offer easy tradability and the ability to provide diversified

market access, making them a potentially attractive investment

solution. In addition, our equity ETFs offer all of the advantages

of physical replication, coupled with a competitive cost structure.

ContactFor more information, please contact us:

Email: broker.sales@hsbc.com

Telephone: +44 (0) 207 024 0435

Website: www.assetmanagement.hsbc.com/passive

Important InformationThis document is intended for professional clients only and should not be distributed to or relied upon by retail clients. The material contained herein is for information purposes only and does not constitute investment advice or a recommendation to any reader of this material to buy or sell investments. Care has been taken to ensure the accuracy of this document, but HSBC Global Asset Management (UK) Limited accepts no responsibility for any errors or omissions contained therein. Any views expressed were held at the time of preparation and are subject to change without notice.

HSBC ETFs are sub-funds of HSBC ETFs plc, an investment company with variable capital and segregated liability between sub-funds, incorporated in Ireland as a public limited company, and authorised by the Central Bank of Ireland. The company is constituted as an umbrella fund, with segregated liability between sub-funds. Shares purchased on the secondary market cannot usually be sold directly back to the Company. Investors must buy and sell shares on the secondary market with the assistance of an intermediary (e.g. a stockbroker) and may incur fees for doing so. In addition, investors may pay more than the current Net Asset Value per share when buying shares and may receive less than the current Net Asset Value per Share when selling them. UK-based investors in HSBC ETFs plc are advised that they may not be afforded some of the protections conveyed by the Financial Services and Markets Act (2000), (‘the Act’). The company is recognised in the United Kingdom by the Financial Conduct Authority under section 264 of the Act.

All applications are made on the basis of the current HSBC ETFs plc Prospectus, relevant Key Investor Information Document (“KIID”), Supplementary Information Document (SID) and Fund supplement, and most recent annual and semi-annual reports, which can be obtained upon request free of charge from HSBC Global Asset Management (UK) Limited, 8 Canada Square, Canary Wharf, London, E14 5HQ. UK, or from a stockbroker or financial adviser. Investors and potential investors should read and note the risk warnings in the prospectus, relevant KIID, SID and Fund supplement. The shares in HSBC ETFs plc have not been and will not be offered for sale or sold in the United States of America, its territories or possessions and all areas subject to its jurisdiction, or to United States persons. Affiliated companies of HSBC Global Asset Management (UK) Limited may make markets in HSBC ETFs plc.

The information in this document is based on HSBC’s interpretation of current legislation and HM Revenue & Customs practice. While we believe that this interpretation is correct, we cannot guarantee it. Legislation and tax practice may change in the future. Tax treatment is based upon individual client circumstances.

HSBC Global Asset Management (UK) Limited provides information to institutions, professional advisers and their clients on the investment products and services of the HSBC Group. This document is approved for issue in the UK by HSBC Global Asset Management (UK) Limited who are authorised and regulated by the Financial Conduct Authority. Copyright HSBC Global Asset Management (UK) Limited 2015. All rights reserved.

27345/ED/0915/FP15-1553. EXP 21/03/2016.