Monday, February 6, 2012

Hang Seng RMB Gold ETF Offering a Fee Waiver

As released here on SD a little over a week ago, the Hang Seng is launching a yuan-denominated gold ETF this month.  It is being marketed as "the world's first-ever RMB denominated gold ETF providing a unique investment choice putting the distinctive features of gold, the RMB, and ETF's all under one roof."  They are even offering a handling fee waiver for subscription between February 6th and 8th!

I spent some time this morning looking deeper into the ETF, not because SD readers are likely to be interested, but to examine how the fund will operate.

Upon my research conclusion, you just wonder who in their right mind would invest in such an ETF.  If you want a currency hedge, the solution remains the same, just buy the PHYZZ and take possession! 

From Hang Seng
Hang Seng RMB Gold ETF (the "Fund") is to provide investment results denominated in Renminbi ("RMB") that, before fees and expenses and other hedging costs, closely correspond to the performance of the London Gold Fixing Price in US dollars ("USD").  The Fund will seek to hedge against the foreign exchange rate movements between RMB and USD so that its performance in RMB will, before fees and expenses and other hedging costs, track the performance of the London Gold Fixing Price in USD as closely as possible. The performance of the Fund is not expected to be materially affected by the foreign exchange rate movements between RMB and USD.  However, investors will be subject to the foreign exchange rate risk when they realise their investment and convert the RMB proceeds into other currencies (for example HK dollars).
The trading price of the Fund's units on The Stock Exchange of Hong Kong Limited will be subject to market forces and may deviate significantly from the Net Asset Value per Unit.
The Fund primarily invests in gold bullion.  There is no guarantee that the price of gold bullion will appreciate.  The Fund may experience greater volatility and may be adversely affected by the performance of industries and sectors or events related to gold and to its production and sale and will cause a fall in the price of the Fund.
The custody of gold bullion for the Fund is different to custody arrangements typical in mutual funds/unit trusts which invest in equities and bonds.  Among which include, but not limited to, the gold bullion held by the Custodian may be lost or damaged and such gold bullion may not be insured.
The Fund is denominated in RMB which is currently not freely convertible and is subject to exchange controls and restrictions.  The Fund is subject to risks associated with RMB including RMB foreign exchange risk, RMB hedging risk, offshore RMB market risk and RMB trading and settlement of Fund's units risk.
The London Gold Fixing Price is quoted in USD.  The Fund will enter into a series of swaps with the Swap Counterparty to hedge against the foreign exchange rate movements between RMB and USD.  In the event of an insolvency or default by the Swap Counterparty, the Fund may be exposed to RMB/USD foreign exchange risk on an unhedged basis.
The Fund is also subject to tracking error risks, risks associated with passive investments and risks of concentration in a particular commodity (i.e. gold).
Investment involves risks and investors may lose a substantial part of their investment in the Fund.
Investors should not only base on this marketing material alone to make the investment decision, but should read the Fund’s offering documents (including the full text of the risk factors stated therein) in detail.