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Exchange Traded Fund (ETF)

Exchange Traded Fund (ETF)

  1. ETF (Exchange Traded Funds) refer to securitization of index. Since index is an indicator for measuring the market trend of increase and decrease, the so-called index securitization refers to that instead of the use of traditional method to perform the investment of a basket of stocks directly, investors are making indirect investments through the holding of beneficiary certificates of stock rights of representative index subject matter.

Product Characteristics

  1. Passive management, seek index return rate
    Through the purchase of ETF, investors can track the index performance and gain the return rate equivalent to the profit and loss on change of index. It is different from the purpose of conventional fund actively seeking performance, and instead, it is for the purpose of simulated index performance, and it mainly allows the net value to maintain a correlation with the index. Therefore, since the content or ratio of the investment portfolio is adjusted only due to the change of the content and weight of the correlation index constituent stocks, it satisfies the purpose of “passive management”.
  2. Products equipped with characteristics of stocks and index funds
    ETF is similar to stocks in that it can be traded at stock exchange market. On the other hand, the subscription and buyback procedure of ETF is similar to the subscription redemption procedure for open-end funds. In addition, the management fee for ETF is lower than the traditional equity funds; therefore, the characteristics of ETF are widely accepted by investors.
  3. Investment portfolio with high transparency
    Since ETF uses the replicate index performance as the target, the investment portfolio content is identical to the subject index composition, and investors can visit any stock exchange or fund company websites to review and inquire the shareholding statements of the investment subject matter, such that the investment transparency is high.  

Hours for accepting applications

  1. The hours for accepting applications of our bank is from 9:00AM to 3:00PM. In case of non-business day or closing day for overseas market of the investment subject matter, then it is deferred to the next business day.

Exchange Traded Fund (ETF) Trading Days

  1. US Exchange Market
    The date when our bank accepts the settlor’s order day (T day) is the trading day, and the trading price is based on the market price of the American Stock Exchange (trading day as the T day in US time) in principle. If the order day of the settlor is not a business day of the American Stock Exchange, then it is deferred to the business day of the American Stock Exchange for trading
  2. Hong Kong Exchange Market
    The business day following the date when our bank accepts the settlor’s order day (T day) is the trading day, and the trading price is based on the market price of the HKEx (trading day as the T+1 day in Hong Kong time) in principle. If the order day of the settlor is not a business day of the HKEx, then it is deferred to the business day of the HKEx for trading.

Relevant Fees for Exchange Traded Fund (ETF)

  1. Subscription handling fee
    Equivalent to multiplying the trust amount by a maximum of 3.0%.
  2. Trust management fee
    Fee is calculated by multiplying the trust amount with an annual rate of 0.2% according to the actual number of management days, and such fee is deducted from the redemption amount when the settlor makes early redemption or upon maturity. Our bank may also choose to settle and accumulate the outstanding trust management fees not yet collected at the end of December of each year, and then deduct such accumulated amount from the account designated by the settlor in January of next year. However, in case of redemption of investment subject matter, our bank may deduct such fee from the redemption price amount.
  3. Securities firm transaction fee
    Upon redemption, the securities firm transaction fee is 0.15% of the redemption trading amount, and it is deducted by the securities firm from the redemption trading amount.
  4. Tax and fees for the investment subject matter Exchange/local government The fees collected by each Exchange/locak government are as follows, and such fees are deducted from the redemption trading amount.
    1. American Stock Exchange
      The required fees include the payment of all taxes (referring to transaction tax, dividend income tax, all belong to the official fees collected by the US government), ADR custody fee, litigation or non-litigation fee, settlement fee etc. All of the aforementioned fees are collected separately upon occurrence of individual events. Relevant fee collection standard may be changed depending upon the changes in the practice or regulations related to the US exchange market.
    2. HKEx
      The required fees include dividend income handling fee, annual transfer fee etc., and such part of official fee is collected separately upon occurrence of individual events, Relevant fee collection standard may be changed depending upon the changes in the practice or regulations related to the Hong Kong exchange market.

  1. ※The above Exchange related fees are provided for reference only, and the actual fee collection shall still be based on the latest regulations and fee collection standards announced by each Exchange.

Investment Taxes

  1. The taxes for settlor’s trust investment in this product shall be handled according to the regulations of the tax law of R.O.C., local tax law of the investment subject matter and relevant laws. Such laws and regulations include but not limited to, according to relevant regulations of the tax law in US, income of non-US individuals gained in the jurisdiction of US, such as cash dividends etc., shall be deducted with a tax amount of 30%. For HKEx, the foreign trading section collects a dividend handling fee of 0.5% for cash dividends. For Mainland China region, dividend income tax of 10% is collected for cash dividends. All of the above taxes are deducted upon the payment of dividends. The aforementioned taxation standards may be changed depending upon the changes of the laws and regulations of the exchange market. Starting from January 1, 2010, individual overseas income shall be declared according to relevant laws, including “Income Basic Tax Act”, “Guidelines for Declaration and Audit of Non-R.O.C. Income and Income from Hong Kong and Macau Counted into Personal Basic Income” etc. For Income from the region of Mainland China, income tax shall be collected according to the regulations of the Act Governing Relations between the People of the Taiwan Area and the Mainland Area, and the insurance fee from the second generation of national health insurance shall be supplemented. Trustee is not obligated to provide recommendations on any possible tax payment required, and settlors shall seek independent professional opinions solely. (includes the Foreign Account Tax Compliance Act, (FATCA))

Possible Potential Risks of Investment

  1. Maximum possible loss risk: Settlors need to understand that for the investment in the ETF market, the trading price fluctuation is relatively great, and there are no upper and lower limits in the extend of price increase and decrease, and the maximum possible loss could be all of the trust principle and the interest accrued. ETF trading method is similar to that of stocks; therefore, in case of major incidents in the market, settlors may face the situation where the price varies greatly at different point of time during the trading.
  2. Market risk: ETF price fluctuations with the market condition, and it may be affected by the environment factors, such as major political incident, significant recession of economy or insufficient confidence of the society etc., such that changes may be reflected in the interest rate, exchange rate and market expectation, leading to significant drop in the overall market price, and consequently, causing the asset net value of this product to be reduced. 
  3. Liquidity risk: ETF may cause the risk where settlors cannot reach a deal in trading due to insufficient liquidity. As the ETF invested adapts derivatives, settlors may face relatively high liquidity risk, and this is mainly due to that the secondary market trading volume of such type of products is small, and the price lacks transparency, causing an increase in the difference in the trading price. As a result, during the purchase and sell of such product, settlors bear relatively greater price difference cost. 
  4. Exchange rate risk: When the pricing currency for the ETF investment subject matter is different from the ETF pricing currency, settlors may face exchange rate risk. When the exchange rate is under significant change, it may have a greater impact on the value of ETF. When settlors adapt NTD or fund in currency not equivalent to this product pricing currency to subscribe ETF at the early stage of the investment, settlors shall be aware that during the return of various profits of ETF and the original investment amount, it will be converted back to NTD asset or fund not equivalent to the original product pricing currency; therefore, there is a risk in the currency exchange being lower than then investment principle. Past performance of exchange rate is not a representative of the future actual trend. 
  5. Passive investment risk: ETF adopts the passive management method, and the goal of the investment is to track the performance of specific index (or product), which is different from the active management method of mutual funds. Fund managers will not try to select individual investment subject matters or actively establish defense position in a counter trend. 
  6. Subject matter tracking error risk: The investment goal of ETF is to seek the performance of tracked subject index prior to the deduction of its relevant fees, and its trend may be highly correlated to the trend of the tracked subject matter. However, it does not guarantee to have a definite correlation The factors affecting the correlation include the management fee, transaction cost, investment technology and tracking tools, liquidity, dividend, commission, conversion cost and relevant income etc. There may be discrepancies between the ETF asset and the tracked subject index constituent stock, and it may cause a difference between the ETF asset net value and the tracked subject index. 
  7. Investment concentration risk: Certain ETF only tracks single asset or type such that it cannot achieve the effect of distributed investment asset, and the level of return fluctuation caused may be greater. When certain ETF uses derivatives, the situation where the issuance institution of the ETF may choose only one derivative trading counterparty for the purpose of maximizing the investment profit goal. Consequently, the performance of such ETF is likely to be affected by the credit risk due to the concentrated trading counterparty. 
  8. Settlement risk: In case where the registration place of the ETF issuance institution or guarantee institution or the country where the settlement system is located is subject to emergency or special condition such that the settlement rules are changed, or due to market condition or regular holidays, then the settlement may be suspended or delayed. For example, in case of high fluctuation or interruption of market, the trading price of ETF may not reflect its actual value. If there is an error in the calculation or trading of the subject index by the issuance institution, then it may also cause settlors to suffer from loss. 
  9. Clearance risk: When the net asset value of ETF at any particular evaluation date is lower than the minimum net asset value specified, the fund managing company may sell all of the holding assets to perform clearance. When the trustee receives relevant information, it will inform the settlor, and will also handle relevant affairs according to the trust contract terms between the trustee and the settlor. 
  10. Credit risk: Settlor needs to bear the risk where the issuance institution, trading counterparty and relevant trading institutions (including but not limited to the depositary institution, custody institution) fail to fulfill the benefit obligation. Before the maturity of the contract, the trading counterparty may fail to fulfill the obligations specified in the contract due to breaches, resulting in the risk of loss.
    1. Derivative risk: When ETF uses derivatives replicated subject index performance, if the trading counterparty of the derivative breaches contract, it will cause loss in the EFT net asset value, and the settlor will then face the credit risk of the derivative trading counterparty. 
    2. Securities borrowed and lended operation risk: When securities borrowed and lended operation is performed on ETF, if the securities borrower fails to return the borrowed securities according to the terms agreed, then such ETF may be subject to loss. 
    3. Collateral risk: ETF issuance institution may hold a collateral provided by the trading counterparty, and once it is to exercise the disposition right, the market value of the collateral may also be far lower than the value at the time of pledge, such that ETF loss may occur. 
  11. Risk for use of derivatives: A portion of ETF may hold derivative positions, and it may cause high fluctuation in the ETF net value and other derived risks, and the maximum possible loss may be all of the trust principle. 
  12. Synthetic replication strategy risk: If ETF adopts synthetic replication strategy, without direct investment in the index constituent securities available inventory but utilizes derivatives, such as futures, options, swap agreement etc. as the tracking tool, in order to replicate or simulate index return, then the risk and loss borne may exceed the amount invested in such tools, in particular, during such product uses leverage operation, the use of derivatives may cause significant changes in the ETF value. If the derivative cannot be completely correlated to the tracking index, then it can cause the ETF to fail to reach the investment goal. For the swap agreement executed, when the asset net value is subject to significant decrease due to market changes, then there is a possibility that the trading is ended immediately under the request of the trading counterparty, such that ETF may not directly enter into another exchange or other derivative product investment to reach the original investment goal. Consequently, it can cause the performance to fail to reach the expectation. 
  13. Compound interest risk: Since reverse or leverage type ETF is designed to seek “daily return” in order to achieve the “certain fixed multiples of tracked subject index”, to achieve the investment goal, it is necessary to perform position exposure value adjustment daily in order to maintain a constant exposure ratio (re-balance investment portfolio). During the daily re-balance of investment portfolio, regardless whether the daily return is positive or negative, the compound interest effect method is used to accumulate the return. Consequently, the accumulated return rate of such ETF for a period of more than two consecutive days or for a long period of time may deviate from the accumulated return for the subject index in the same period. Moreover, the direction of deviation cannot be predicted such that it may be in the positive or negative direction. In addition, as the period of time becomes longer, the compound interest effect difference can be greater. 
  14. Tax risk: The investment subject matter profit can be affected by the tax laws applicable to the issuance institution, country, Exchange and settlor. In case of change of relevant tax laws, the investment profit may not be the same as the expectation at the time of investment. 
  15. Legal risk: Overseas investment subject matter at the overseas securities market exchange shall be handled according to the laws and exchange market regulations. The regulations for the investment subject matter issued by the trading counterparty may be governed by the foreign laws, and the English version of prospectus, investor instructions or product brochure are used as the primary basis for the criteria of issuance. Settlors shall carefully read and sufficiently understand the content of such documents in order to determine whether to make investment and to bear the investment risk. 
  16. Country risk: In case where the registration country or the ETF issuance institution or guarantee institution or the country where any investment subject matter is located is subject to events of political, economy, war, riot or other force majeure events, it can cause settlors to suffer loss. 
  17. Asset net value premium and discount risk: Investment in ETF, in practice, often faces the situation where the market price is inconsistent with the asset net value. The market price is mainly affected by the supply and demand in the secondary market or the market fluctuation condition. if the ETF issuance institution fails to create or reduce the ETF issuance volume according to the market condition, then the asset net value premium and discount may always exist. 
  18. Valuation risk: For ETF investment portfolio subject matter, the valuation technique is used rather than the price determined based on the market quote. The valuation result can be different depending upon different valuation method adopted. The use of valuation method to calculate the investment portfolio value may be subject to greater fluctuation than the use of market quote. ETF investment portfolio subject matter may not be sold in the market based on the valuation result. When the investment portfolio subject matter needs to be sold at a price lower than the valuation result, ETF asset net value loss may occur. 
  19. Emerging market risk: Emerging markets are different from the developed countries, and their risks are higher than the developed countries. These risks include the risks caused by the issues of relevant liquidity due to smaller capital in the securities market, price fluctuation, foreign investment restriction, government interference in economy, incomplete legal protection, social, economic and political uncertainties etc. 
  20. Investment portfolio turnover risk: Frequent transaction or redemption actions of ETF asset can cause an increase in the investment portfolio turnover rate such that the trading cost is increased, which may also increase the tax cost in the spatial gain. 
  21. Early closure and stop of trading risk: Exchange or market may be subject to special mechanism of early closure or announcement of stop of trading, which will restrict the purchase and sell of this product. In addition to the impact on the liquidity, the actual trading price may also be affected such that trading loss may occur. 
  22. High yield risk: When ETF is invested in high yield (credit rating not reaching the investment level or without credit rating etc.) bonds, the characteristics of such type of bonds will cause the ETF to face relatively high interest rate risk, credit risk, liquidity risk and valuation risk. High yield bonds are relatively sensitive to the political and economic conditions or company development outlook, and the price fluctuation is often great. In addition, its valuation may be difficult due to the lack of secondary market trading. Issuance institution of high yield bonds may not be able to pay the principle and interest; therefore, it is often considered as an investment of relatively high risk of breach of contract. When the economic trend declines or interest rate increases, it may reduce the liquidity of the high yield bond, causing the ETF issuance institution to fail to obtain the correct valuation in order to measure the value of the investment portfolio, such that valuation risk may occur. If a high yield bond is equipped with the buyback mechanism, the issuance institution will redeem the original bond when the interest rate decreases, and it may force the fund manager of ETF to replace the original bonds at a relatively higher interest rate with bonds at a lower interest rate in the current market, resulting in the reduction of return of ETF. High yield bond trading cost (including purchase and sale price difference) may be subject to significant fluctuation such that ETF performance can be affected. 
  23. Network trading risk: In case of malfunction of computer system, computer network, mobile device network or telecommunication lines, power outage, conducts of third party or other force majeure factors, causing the trustee to be unable to perform trading according to the instructions, settlors may then be subject to loss. 
  24. Others: In addition to the aforementioned risks, investment in ETF may also be subject to any other investment risks due to political, economic, country, market and other force majeure or matters not attributable to the trustee. 

Exchange Traded Fund (ETF) Products Sold by Our Bank

  1. Download instructions
  2. Shall you have any questions, please contact our Customer Service Center or operating counters at each branch or please contact Trust Division at (02)2536-2951, Ext. 2214~2219