For professional clients only

The funds and their market

ETF Masterclass Series Part 2

1

ETFs and the intermediary market ` ETFs are an important part of the overall growth of passive

investments

` In our view, intermediaries are comfortable with ETFs on the

whole, as these funds have very good transparency and the

ability to access a variety of markets cheaply

` Advisers are more familiar with index funds but as ETFs

become increasingly available on fund platforms, advisers will

be using them interchangeably with index trackers

` However, ETFs are not yet available through all platforms.

This is the main reason for advisers not being as familiar with

some of the more technical aspects of these funds as they

could be.

` Therefore, fund providers have an important role to play in

providing more education around ETFs

ETFs’ place in investment portfolios ` One of the main reasons for the strong growth of the passive

market has been that advisers recognised that ETFs play a

major role in investors’ portfolios

` There has been a step change in how investors are making

their asset allocation decisions and how ETFs are used to

provide market access, whether over the short to medium

term, or, increasingly, over the long term

` Intermediaries’ strengthening focus on costs in the

environment following the Retail Distribution Review (RDR)

has also helped to cement that trend

ETF range from HSBC ` We target our ETFs at our external as well as internal clients

within the HSBC Group and this gives us a perspective on

what our offering should be like. Our approach to the ETF

product is, therefore, conservative

` Our ETF range is what might be termed as ‘vanilla’ - they are

all physically replicated, which means that where possible

we buy all of the stocks in the underlying index. Currently

we only offer equity ETFs and we are sticking to the core

investment markets which we believe should be the major

building blocks for the majority of clients

Education and Due Diligence ` While intermediaries are responsible for making the right

recommendations to their clients according to their individual

circumstances and objectives, we believe that fund providers

have a role to play in helping investors and advisers make

better informed investment decisions

` We believe that, compared with active fund selection, due

diligence for passive funds still has some way to go

` The industry does not seem to have a consistent set of

metrics for conducting due diligence for ETFs. Some clients

look at a combination of different factors, for example

tracking error, tracking difference and total cost of ownership.

Therefore, we believe that explaining what those individual

metrics are and bringing them to life is an important part

of what fund providers can do to assist the marketplace to

evolve

` For instance, in our view asset managers should provide

education around benchmarks and how they differ from

each other. This relates directly to replication and looks at

differentiating factors between index providers, the indices

themselves and the way they are constructed

` Another topic that would benefit from more discussion is the

use of passive strategies and blending passive and active.

Some investors employ active funds to invest their entire

portfolios, while some use the combination of active and

passive.

` In deciding the right strategy, clients have many different

factors to consider, and new factors continue to emerge. For

example, recent research showed that passive strategies

can be a very cost effective way to get exposure to some

developed markets, such as the US

Looking ahead ` Compared to five years ago, the passive investments market

has grown significantly and ETFs have provided a bulk of that

growth

` ETFs have expanded in range and become more mainstream

in the UK

` There is a lot of work still to be done to make ETFs fully

interchangeable with other passive funds. We believe that

achieving that will become another big step for passive

investments

The funds and their market

2

Key Risks

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.

Investment horizon:

Stockmarket investments should be viewed as a medium to long

term investment and should be held for at least five years

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 funds 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.

Performance risk:

Past performance is not an indication of future returns

ContactFor more information, please contact us:

Email: broker.sales@hsbc.com

Telephone: +44 (0) 207 024 0435

Website: www.assetmanagement.hsbc.com/passive

Important Information

This document is intended for Professional Clients only and should not be distributed to or relied upon by Retail Clients. HSBC’s range of ETFs are a sub-fund of HSBC ETFs plc (“the Company”), an investment company with variable capital and segregated liability between sub-funds, incorporated in Ireland as a public limited company, and is 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. 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.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. 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 and Fund supplement (where available) and additionally, in the case of retail clients, the information contained in the

supporting SID. 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. Where overseas investments are held the rate of currency exchange may also cause the value of such investments to fluctuate. Stockmarket investments should be viewed as a medium to long term investment and should be held for at least five years. 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 © 2014 HSBC Global Asset Management (UK) Limited. All rights reserved. 26156/AS/1114/FP14-1705. Expiry Date 01/11/2015

Index disclaimers

“FTSE®” is a trade mark of the London Stock Exchange Group companies, “NAREIT®” is a trade mark of the National Association of Real Estate Investment Trusts (“NAREIT”) and “EPRA®” is a trade mark of the European Public Real Estate Association (“EPRA”) and all are used by FTSE International Limited (“FTSE”) under licence.” The FTSE 100 Index, FTSE 250 Index and FTSE All Share Index are calculated by FTSE. Neither FTSE, Euronext N. V., NAREIT nor EPRA sponsor, endorse or promote this product and are not in any way connected to it and do not accept any liability. All intellectual property rights within the index values and constituent list vest in FTSE, Euronext N.V., NAREIT and EPRA. HSBC Global Asset Management has obtained full licence from FTSE to use such intellectual property rights in the creation of this product. Standard and Poor’s 500 is a trademark of The McGraw-Hill Companies, Inc. and has been licensed for use by this Fund. The Fund is not sponsored, endorsed, sold or promoted by Standard & Poor’s and Standard & Poor’s makes no representation regarding the advisability of investing in this Fund.