Monday, February 13, 2012

First RMB ETF (Hang Seng Gold Stock Code Analysis

Hang Seng RMB Gold ETF (HS RMB Gold ETF stock code: becomes the first-ever Renminbi (RMB, CNY, Yuan, or in Hong Kong called CNH) Exchange Traded Fund (ETF) in Hong Kong. An Exchange Traded Fund (ETF) is an open-ended fund that, by definition, can be traded on a stock exchange (ie: a secondary market) just like a share.

The Hang Seng (HS) RMB Gold ETF has been open for subscription until February 8, 2012 and will be publicly listed on February 14, 2012 on the Hong Kong Stock Exchange (SEHK). The following is our detailed HS Gold ETF stock analysis report:

(1) This first offshore RMB-denominated ETF will invest through the gold dealer (currently the Hang Seng Bank) primarily in physical gold bullion (minimum fineness of 99.5% gold) as its underlying asset which targets to track closely the performance of the London Gold Fixing Price (quoted in U.S. dollar) published by the LBMA (London Bullion Market Association) as its underlying benchmark. Hence the key question is: Do you think Gold is really a good investment item?

In fact, Gold is more than just a commodity and its price is affected not only by industrial demands and supplies. It is also widely recognized as a safe haven to hedge against inflation risk and USD depreciation particularly during times of crisis and fear.

Latest Spot Gold price graph

Current Spot Gold Price Chart (1971-2011)

Gold basically has at least 3 separate roles: it can be considered as a strategic investment tool (against inflation), as a kind of zero-interest currency (against USD, EUR, JPY etc), and as a kind of commodity (just industrial goods affected by consumption and production each year). Owing to the recent credit crisis and quantitative easing policy of developed countries like the U.S., U.K. and Japan, people nowadays know that paper money can be over-printed. This makes Gold attractive to investors who seek for temporary safe haven or even do not trust the value of paper money. However, in practical, its price trend is highly volatile and very hard to be predicted. It is because gold price can be affected by so many different sources of news under a wide range of economic topics in a lot of countries. Definitely, Gold should only be suitable for advanced investors who are familiar with the whole range of global economic topics.

(2) The Hang Seng RMB Gold ETF (stock code: will, however, attempt to hedge the RMB exchange rate risks against USD by utilizing foreign exchange swaps and unfunded asset swaps through the Hang Seng Bank on a daily basis. By making use of these derivative instruments, this ETF can avoid its performance to be affected by the daily RMB forex fluctuations. Such unique currency hedging strategy makes it different from the existing RMB-denominated Kilobar Gold product offered since October 2011 by its competitor, the Hong Kong Chinese Gold & Silver Exchange (CGSE). The hedging function sounds pretty good in theory but of course, you will need to pay for it (please refer to the Swap CounterParty Fees on the table shown below for details). It is just like you request to buy this service at Hang Seng Bank counter. In addition, since the London Gold Fixing Price is actually USD-denominated, this "RMB-denominated" ETF should basically mean "providing investment results denominated in RMB" through derivative instruments.

(3) Initial issue price per fund unit (in CNH) to be set as the value of 0.1 gram of gold bullion according to the London Gold Fixing Price as of February 13, 2012. The ETF is cash settled in CNH.

(4) The ETF is a sub-fund of the Hang Seng Investment Precious Metals Series. Here is the ongoing fee structure of this sub-fund:

Type of Fee(s)Annual Fee Rate (% of NAV)
Management Fee1% maximum, although 0.15% currently
Trustee and Registrar Fee1% maximum, although 0.12% currently (RMB 30K minimum per month in the initial 18 months and then RMB 65K minimum per month)
Trustee Service FeeRMB 21K
Service Agent FeeHKD $5K per month
Custodian Fee0.1% maximum
Performance FeeNil
Swap CounterParty FeesIndirect fees (built into the value of swaps) from swap transactions

Table of Ongoing Fees for the Hang Seng RMB Gold ETF

Source of IPO Prospectus: Hang Seng Bank (HSB stock code: Investment Fund Management Services - Member of HSBC Group.

The ongoing charges are to be deducted from the Net Asset Value (NAV) of the ETF directly. Estimated Total Expense Ratio (TER) of the ETF, which is the sum of direct fees to the ETF as a percentage of its CNH NAV, is currently 1% maximum (indirect fees excluded).

From the above table, you may expect that the maximum annual fund maintenance fee (including direct and indirect charges) can be far over 2%, which will be rather expensive. Well, we should not expect a very competitive fee structure though, it is quite normal for many products of the Hang Seng Bank. However, we are disappointed that the Swap CounterParty Fees have no transparency at all. These are hidden fees for foreign exchange swap operations and there is even no ceiling for this kind of indirect fees payable to the Hang Seng Bank.

(5) Dividend Policy: Similar to most gold-related investments, this ETF will not distribute and pay any dividend.

(6) Like the other index-tracking ETF, this HS RMB ETF is subject to liquidity risk, tracking error (though the ETF fund manager expects 2% maximum per year) risks, deviation risk from its Net Asset Value (NAV) per fund unit, risk of trading suspension, and risks associated with passive investments etc. There is no guarantee that this ETF will be traded with high volume similar to the Tracker Fund of Hong Kong (stock code: or the high-premium iShares FTSE A50 China Index ETF (stock code: This HS RMB Gold ETF is also subject to concentration risk (only invest in bullion), offshore CNH market risk, gold market investment risk, as well as the forex hedging swap counterparty (currently the Hang Seng Bank) risk.

This stock analysis conclusion: We choose not to recommend a buy for this Hang Seng RMB Gold ETF (stock code: Although the idea of RMB-hedging is good, we see no special reason why you should not buy gold in your local currency through for example SPDR Gold Shares ETF (stock code: GLD) and, if you have extra CNH holdings why you not to hedge the forex risk on your own. The Hang Seng ETF, however, will still suitable for investors who would like to retain their current offshore CNH holdings, are lacking of forex hedging experience and are also long-term positive about the trend of gold prices.

Related article(s): How to Invest in RMB Stocks Outside China

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Table of Summary: All Our Stock Analysis Reports


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