lyxor guide

T h e A u t h o r i t a t i v e G u i d e t o

L y x o r E T F

www.lyxoretf.com.hk

A NEW WAY TO OWN THE WORLD

This document is prepared by Lyxor International Asset Management for information only.

2

Con ten t

About Exchange Traded Funds 3

The Lyxor ETF Advantage 5

Replication Methodologies 7

What Investors Like About ETFs 8

Value-added ETF Investment Strategies 11

Trading of ETFs 13

Monitoring of ETFs 16

How to use the Lyxor ETF Website 17

Glossary 18



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Abou t Exchange T raded Funds Exchange Traded Funds (“ETFs”) are open-ended index-tracking funds that trade, settle and pay dividends like a stock on an exchange, such as the Hong Kong Stock Exchange (“HKEx”). In Hong Kong, ETFs are regulated by the Securities & Futures Commission (“SFC”) as authorized collective investment schemes.

The investment objective of an ETF is to track a predetermined benchmark index that typically represents an asset class, a country or a market. Like stocks, ETFs are identified by unique stock codes when trading on the HKEx. To give an example, the Lyxor ETF MSCI India (stock code: 2810) aims to replicate the performance of the MSCI India Index.

The management fee of an ETF is often quoted as a Total Expense Ratio (“TER”) , which is calculated and accrued daily in the Net Asset Value (“NAV”) calculations and directly deducted from the ETF

regularly. ETFs typically charge lower fees than traditional mutual funds. For example, Hong Kong listed Lyxor ETFs are charged between 0.30-0.85%.

Investors buy and sell ETFs through brokers on the HKEx. It is common for ETFs to restrict creation and redemption of ETF units only to selective Authorized Participants who are typically large financial institutions. To facilitate trading and ensure liquidity, all Hong Kong listed ETFs are required to appoint market makers who are obliged to provide real time two-way quotes. For Hong Kong listed Lyxor ETFs, SG Securities (HK) Limited has been appointed as the dedicated market maker.

ETFs are benchmark tracking investment funds. As such, the performance of an ETF should be similar to that of its benchmark index. For example, if the benchmark index of an ETF goes up by 10%, the corresponding ETF should be expected to go up by approximately 10%.

ETFs offer investors the best of both worlds:

Like funds, ETFs offer investors instantaneous diversification in a single trade and at relatively low minimal cost.

Like stocks, ETFs are publicly traded through brokers with real time two-way quotes and intra-day liquidity.

Exchange Traded Fund Mutual Fund Stock

Diversification Continuous Trading & Pricing Sales Charges 3-5% Brokerage Commission Management Fees 0.09-0.99% p.a. 1-2% p.a. Traded Through Broker Cash Settlement T+2* Upfront T+2*

Dividend Liquidity Intraday Not Intraday Intraday

*T+2 means two business days after trade date

The TER of Lyxor ETF represents the management fees that are charged to the fund.



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Since the launch of SPDR (S&P 500 Depository Receipt), the world’s first modern day ETF in 1993 in the U.S., ETFs have become the Cinderella story of the investment world. Today, ETFs are a global phenomenon with approximately US$800 billion of assets in more than 1,170 ETFs1. Accelerated growth in both the number of products and assets under management (“AUM”) was witnessed during the past 7 to 8 years. Morgan Stanley optimistically predicts that worldwide ETF AUM could reach US$2 trillion by 20112. The optimism is based on an ever expanding array of new users, new entrants, innovative new products and heightened turnover.

In Asia, the Tracker Fund of Hong Kong (stock code: 2800) became the first home-grown ETF listed on the HKEx in 2000. Following in its footsteps, a few other ETFs benchmarked on various China-related indices were launched. In 2004, the world’s first ETF tracking the Chinese A-shares market was listed in Hong Kong, drawing investors from all over the world. Now ETFs are present in almost every Asian market.

In early 2007, 7 international Lyxor ETFs including the territory’s first commodity-based ETF were cross-listed for trading in Hong Kong. These ETFs invest in markets around the region and globally, providing investors with convenient and low cost investment instruments to “own the world”. Their addition further bolsters Hong Kong’s ambition to become a regional ETF trading hub. 1 Morgan Stanley, End of Year 2007 Global ETF Report

2 Morgan Stanley ETF Research

More importantly, regional and local investors can now easily tap into an ever expanding universe of investment opportunities covering global and regional equity markets; exotic economies like India and Russia; and global commodities through Hong Kong listed ETFs. As at the end of 2007, there were 19 ETFs trading on the HKEx3, making it the second most active ETF market in Asia, behind Japan.

The 12 Lyxor ETFs currently trading on the HKEx are:

Lyxor ETF FTSE RAFI US 1000 (2803)

Lyxor ETF FTSE RAFI Europe (2806)

Lyxor ETF Commodities CRB (Reuters/Jefferies CRB Index) (2809)

Lyxor ETF MSCI India (2810)

Lyxor ETF MSCI World (2812)

Lyxor ETF MSCI Korea (2813)

Lyxor ETF Japan (Topix®) (2814)

Lyxor ETF MSCI AC Asia Pacific ex-Japan (2815)

Lyxor ETF MSCI Emerging Markets (2820)

Lyxor ETF Nasdaq-100 (2826)

Lyxor ETF Russia (DJ Rusindex Titans 10) (2831)

Lyxor ETF MSCI Taiwan (2837)

3 Including the 2 cross-traded ETFs which operate under the HKEx Pilot

Program.

Worldwide ETF Growth

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ETF Assets USD Billions No. of ETFs



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The Lyxo r ETF Advan tage The Manager of Lyxor ETFs is Lyxor International Asset Management (“Lyxor AM”). It is an investment management company established and regulated in France. Lyxor AM is an indirect wholly-owned subsidiary of Societe Generale Corporate & Investment Banking (“SGCIB”) which is an integral part of Societe Generale, one of the largest financial and banking conglomerates in the world.

Lyxor AM’s unique business model has positioned it as a specialist, a niche player, with expertise and leadership focused on three expanding investment markets: index trackers & ETFs, structured funds and alternative investments. Today, Lyxor AM has expertise in offering tailored investment solutions to meet the dynamic needs of global investors.

Industry recognition

Lyxor AM has been recognized as a leader in the asset management field by financial market communities worldwide. Over the past few years, Lyxor AM has won numerous industry awards. One of the more important ones is the AsiaRisk Awards, which are designed to recognize best practices and in innovation in derivatives and risk management in Asia Pacific.

Asset Manager of the Year 2004 & 2007

Since its inception in 1998, Lyxor AM has experienced tremendous growth and is currently managing US$107 billion of assets, of which US$37.7 billion are represented by index trackers and Lyxor ETFs.

Lyxor AM Assets Under ManagementAs at end of Dec 2007 (USD bn)

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Alternative Investments 0.2 1.8 3.1 6.6 14.0 26.7 24.8 30.6 37.9

Structured Management 0.12 0.5 1.8 5.0 10.2 17.3 23.4 23.2 25.1 31.2

Index Tracking 0.2 1.1 2.2 4.7 9.0 12.9 24.7 37.7

1998 1999 2000 2001 2002 2003 2004 2005 2006 YTD 2007

0.12 0.73.8

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59.1 61.0

80.4

107.7



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Leadership in ETFs – Unique Innovation

Since 2001, Lyxor ETF has been a market leader in European ETFs. At the end of 2007, Lyxor AM managed US$31.5 billion of Lyxor ETF assets and a 24.5% market share in Europe4

Lyxor ETF comprises a comprehensive range of over 100 ETFs covering asset classes, geographic regions, countries, markets, industry sectors, fundamental indices, global themes and strategy indices, including Europe’s largest ETF, the Lyxor ETF DJ Euro Stoxx 50^. Most Lyxor ETFs are French based funds and all are UCITS III compliant.

4 Morgan Stanley, End of Year 2007 Global ETF Report

Due to the use of synthetic replication strategy, Lyxor ETFs follow very closely their respective benchmark indices. Tracking errors are typically close to zero and correlations are over 99.9%. With Lyxor ETFs, investors get the market performance with no surprise.

Whilst most of the Lyxor ETFs trade primarily across different European exchanges, selective ETFs have been cross-listed in Asia since late 2006. To date, 12 Lyxor ETFs are trading in Hong Kong and another 8 are trading in Singapore.

Awards and recognition§

Lyxor AM and the Lyxor ETFs are highly acclaimed and recognized by the industry for product innovation. These are some of the important industry awards received by Lyxor AM most recently:

§ The Awards in 2007 were awarded based on the performance in 2006 and the Awards in 2008 were awarded based on the performance in 2007. ^ The ETF is not authorized and available in Hong Kong.

Global ETF Awards 2007“The Most Innovative ETF Products in Europe” “The most recognized ETF Brand in Europe”“The most informative website in Europe” “The most assets raised in Europe” for Lyxor ETF DJ Euro Stoxx 50”

The Global ETF Awards is organized by Exchangetradedfunds.com a website which aims at providing ETFs information from a product aspect point of view. Funds are awarded by votes of the ETF industry and on the basis of statistical data.

Lipper Fund Awards 2007Award for the Lyxor ETF EuroMTS Global : Best fund for the last three years- Bonds Euro zone

The Lipper Fund Awards are given by Lipper a Reuters Company. Funds are awarded according to the Lipper Fund Awards program which highlights funds with the best risk adjusted performances relative to peers.

Funds Europe Awards 2007Fund Launch of the year-Lyxor ETF MSCI India

The award is organized by the famous Pan-European journal Funds Europe. An external panel of judges reviews ETFs pitches, votes and awards best funds among the global ETF industry.

Feri Fund Awards 2008Fund innovations-Lyxor ETF FTSE RAFI Europe

The Feri fund platform awards funds with the most attractive performance as compared to opportunity and risk. Feri awards eleven categories of fund.

Euro Fund Awards 2008Lyxor ETF LevDAX® : 1 year - 1st Place Lyxor ETF DJ Stoxx 600 Telecommunications: 1 year - 2nd Place Lyxor ETF Euro MTS 1-3 Y: 1 year - 2nd Place

€uro-Fund-Awards 2008 are presented in 61 categories. The universe for the €uro-Fund-Awards is the published statistic in the monthly German magazine €uro, the weekly €uro am Sonntag and the Online-Newsletter €uro fondsxpress.

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Rep l i ca t i on Me thodo log ies As the investment objective is to track its benchmark index, the choice of a replication methodology is the key to achieving this goal. Replication methodologies are techniques used to replicate the performance of a benchmark in passive management. The most popular replication methodologies are: full replication, representative sampling and synthetic replication. There are pros and cons associated with the different types of replication strategies. The choice of replication strategies depends on many factors including the set up of the Manager, regulatory compliance considerations, costs versus tracking error risk considerations, the complexity of the benchmark indices, among others.

Full Replication In full replication, the Manager holds substantially the same stocks in the same proportion as the weightings of the constituent stocks in the benchmark index. In this way, the Manager can closely replicate the performance of the benchmark index. However, if the benchmark index consists of a

large number of constituents or many illiquid stocks, a full replication strategy can be both costly and difficult to execute. For example, an S&P 500 ETF is likely to own all the 500 constituents in the portfolio as all of them are very liquid and readily available.

Representative SamplingIn representative sampling, the Manager tries to replicate the performance of the benchmark index by constructing a portfolio that exhibits similar portfolio characteristics, such as return and risk profile, market capitalization bias, growth or value style bias, etc. as those of the benchmark index. Since the portfolio can own substantially fewer stocks than the

benchmark, it can be more cost effective. However, significant tracking errors can also occur due to mismatching. For example, the Japan Topix Index and the Russell 3000 Index both contain a large number of stocks that can be more effectively replicated using representative sampling.

Synthetic Replication Synthetic replication involves the use of derivatives and is the latest technology available for benchmark replication. The increasingly popular use of synthetic replication in passive management is made possible by the recent relaxation in regulatory restrictions on the use of derivatives and the advent of derivative innovation, such as equity-linked swaps (“ELS”),

which can deliver precise and pre-determined performance. With synthetic replication, the ETF receives almost perfect benchmark performance from the ELS issuer (the “counterparty”) and thus can guarantee near high correlation and low tracking error for the fund.

Why does Lyxor International Asset Management (“Lyxor AM”) choose synthetic replication? Lyxor AM uses synthetic replication to manage its entire family of Lyxor ETFs because of the many benefits the strategy offers. First and foremost is that Lyxor ETFs can offer high correlations relative to their benchmark indices with extremely small tracking errors. Secondly, synthetic replication features a highly efficient management structure and thus allows for a lower pricing structure for Lyxor ETFs. Finally, the simplicity of the synthetic replication strategy allows a diverse set of ETFs covering a wide

variety of asset classes, markets and market segments to be launched within a relatively short time span, all based on the same management platform. Lyxor AM now offers over 100 ETFs worldwide with more new products planned. Most importantly, all Lyxor ETFs are in full compliance with the pan-European UCITS III Directive which regulates all European based mutual funds that are eligible to be distributed throughout the European Union community.



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Wha t I nves to r s L i ke Abou t ETFs

E f f i c i e n t – C o s t e f f i c i e n t

T r a n s p a r e n t – E a s y t o f o l l o w a n d c o n t r o l

F l e x i b l e – T r a d e l i k e l i s t e d s e c u r i t i e s



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Efficient ETFs are highly efficient and cost effective both as investment instruments and as tools to implement investment strategies. In a single trade, investors can gain a diversified exposure to a market or a market segment, represented by a benchmark index. This is an extremely cost effective way for investors to gain diversification at minimal cost. In addition, ETFs also provide market accessibility to smaller investors into emerging markets or commodities that are restricted or hard to access.

Trade execution and settlement for ETFs are conducted in exactly the same way as buying and selling stocks, with only normal brokerage commission and exchange tariffs applicable. In Hong Kong, trading in ETFs with non-Hong Kong underlying investments (e.g. all locally listed Lyxor ETFs) are exempted from stamp duty. This compares very favourably to sales and/or redemption

charges of up to 5% charged by traditional mutual funds.

On an ongoing basis, ETFs generally charge lower TERs and incur lower transaction expenses than traditional funds. Lower fees translate into higher performance over the long term. For example, Lyxor ETFs listed in Hong Kong charge TERs of 0.30-0.85%, much lower than the 1-2% management fee levels typically charged by traditional mutual funds covering similar markets.

Finally, as index-tracking funds, ETFs embody all the benefits of passive management. The self rebalancing nature of index funds to reflect index changes allows investors to stay abreast of current market trends. For detailed information on the benefits of passive management, please visit the Lyxor ETF website at www.lyxoretf.com.hk and download the article Why Passive Management Makes Sense.

Transparent There are various levels of transparency in ETFs. All of them make ETFs very easy to trade, own and monitor. These endearing features are some of the main reasons why investors, large and small, increasingly embrace ETFs as their choice of investment.

First of all, ETFs are performance transparent. If the benchmark index of an ETF goes up 10%, investors can expect the NAV of the same ETF to increase by approximately 10%. There should be no surprise element vis-à-vis either out- or under-performance. This is important, as ETFs afford investors the ability to implement their macro views without fear of nasty performance surprises.

Secondly, ETFs are holdings transparent. Since ETFs track many public and well-recognized benchmark indices, the holdings underlying these benchmarks are mostly known. Moreover, it is customary for an ETF manager to disclose the perfect baskets of ETFs regularly. As such, investors can easily access details of what underlying stocks they hold through their ETF. This should be enormously comforting when compared to the opaqueness of traditional mutual funds where stock holdings are made public only twice a year and with

much time delay. The perfect baskets of all Hong Kong listed Lyxor ETFs are published daily at www.lyxoretf.com.hk.

Thirdly, ETFs are fee transparent. Most ETFs charge a TER which represents the only fee payment that an ETF will pay its Manager. All other fees and expenses will be paid out from the all-in TER by the Manager. In contrast, traditional mutual funds will typically only disclose their management fees but not other hidden expenses relating to the running of the funds. The resultant higher annual charges will adversely impact the funds’ long-term performance.

Fourthly, ETFs are price transparent. Live trading of ETFs on exchanges allows investors to implement views or react to news throughout the trading day. To assist investors, indicative Net Asset Values (“iNAV”) of ETFs are published throughout market opening hours giving estimated NAVs of the ETF portfolios at the time of calculation. Investors can use iNAVs to determine whether the trading prices or bid/offer quotes of an ETF represent fair value. The iNAVs of all Lyxor ETFs listed in Hong Kong are available at www.lyxoretf.com.hk. The TER of Lyxor ETF represents the management fees that are charged to the fund.



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Finally, ETFs are execution transparent. Investors can employ traditional stock trading techniques such as placing limit orders or trading at opening or closing so execution prices are always known. This is

a far cry from the forward pricing policy adopted by traditional mutual funds.

Flexible ETFs offer unparalleled flexibility to investors either to target their investments precisely or to implement sophisticated investment strategies. Live trading of ETFs allows investors to react to rapidly changing markets. Stock-like features such as margin purchase and short selling empower investors to leverage and hedge.

Furthermore, a combination of low fees, diversification and lower volatility means ETFs are great investment vehicles for long-term investing. Additionally, the unique ability of ETFs to trade live on exchanges also allows ETFs to be bought and sold conveniently and cheaply for short-term, tactical trading purposes.

Whilst ETFs are efficient investment instruments, they are most effective when used as tools for implementation of investment strategies. With an ever expanding universe of ETFs covering asset classes and market segments, investors can take advantage of their availability to construct portfolios that meet their respective requirements.

By simply mixing and matching different ETFs, investors can readily construct fairly comprehensive portfolios. When combining ETFs with other investment products, more sophisticated portfolios can be realized. When the ability to short sell ETFs is taken into account, the opportunity is almost endless and sophisticated investment strategies, such as relative value strategies, can be implemented.

It is exactly because of this flexibility that ETFs have endeared themselves not only to ordinary investors, but also to some of the most sophisticated investors, such as hedge fund managers, around the world.

In conclusion, ETFs are a rare breed of investment instruments that are simple, low cost and convenient to use. The neutrality, diversity and abundance of ETFs offer great coverage of investment areas. These, in combination with public trading and their stock-like features, further allow them to be used by investors of all kinds.



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V a l u e - A d d e d E T F I n v e s t m e n t S t r a t e g i e s Strategic – Buy and Hold ETFs cover many asset classes, markets and industry sectors and are thus ideal to be used as portfolio construction tools for long term strategic asset allocation. Low management fees that benefit long-term performance further add to that appeal.

More importantly, strategic asset allocations are made mostly with expected market returns in mind and the benchmark performance profile of ETFs with no active surprises make them ideal candidates as asset allocation tools.

Opportunistic – Tactical Trading Whilst capital markets are largely efficient, opportunities for short-term trading do exist. With live trading at a low cost and good liquidity, investors can profit from taking advantage of cyclical opportunities.

Akin to tactical trading, ETFs can also be used effectively for asset transitions. The ability to short sell ETFs is a major bonanza to implement an asset allocation decision instantaneously.

Implementation of a simple asset allocation decision within a global portfolio, such as increasing Japanese exposure by 5% and reducing exposure to Europe by the same amount, often translate into many stock specific and timing decisions and will take time to

execute. This will cause undue delay and potential impact to performance.

Asset allocation decisions can be implemented instantaneously using ETFs. For example: buying a Japan ETF and shorting a Europe ETF simultaneously with an amount equivalent to 5% of the portfolio. With two trades, the asset allocation decision is completed. The Manager can then work on “refining” the decision by replacing the Japan ETFs with selective Japanese stock holdings. At the same time, when selective European stock holdings are sold off, the short position in the Europe ETF will then be covered.

Core-Satellite Investing The core-satellite strategy is one of the most efficient strategies in terms of risk/return profile. This strategy is used mainly by institutional investors, especially pension funds. The core-satellite strategy involves dividing one’s investments into a stable long-term core and “higher risk, higher return” satellite investments that can be adjusted more frequently. The proportion between the core and satellites vary with individual strategies and are also dependent on pre-determined risk/return profiles.

The core investments are held for the long term and are often made up of broad-based index products owing to their low costs and relative stability. ETFs based on broadly diversified indices are ideal core investment products.

Satellite investments are normally represented by more concentrated investments that are riskier but

are also expected to provide higher returns. Single country/market sector ETFs, emerging market ETFs and commodities ETFs are good candidates for satellite investments. Of course, satellite investments can be any other active investment products, single stocks, or even direct investments like real estate. Satellite investments can be adjusted frequently to take advantage of short-term market inefficiency.

Until the recent advent of ETFs, the core-satellite strategy remained a good but impractical concept for most investors because of the relatively large asset size requirement. Today, institutions and pension plans draw routinely from an ever increasing pool of ETFs as an integral part of their core-satellite strategies. Many individual investors who have discovered the benefits of ETFs are beginning to do the same.



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Hedging – Risk Management

The ability to short-sell ETFs provides investors with an effective tool for managing risk. ETFs can be sold short against long stock positions or mutual funds held to hedge against expected market declines.

ETFs are being used increasingly for hedging despite the traditional use of index futures for this purpose. There are a few reasons for this. Firstly, as ETFs are not derivatives, many institutional investors who are

forbidden from using derivatives can use ETFs. Secondly, as there is no quarterly rolling, investors can save on costs and avoid roll risk and margin calls. Thirdly, ETFs can be bought in smaller increments. Lastly, ETFs cover far more markets and sectors than index futures and, in many instances, are more liquid than index futures.

Market Access In an environment of expanding globalization, international investing is becoming increasingly popular and diversification remains a key weapon in fighting heightened market volatilities. More importantly, investments in emerging markets and commodities offer investors higher real performance. Against this backdrop, ETFs are being used more and more as market access tools for the following reasons.

Firstly, the proliferation of ETFs in recent years means that coverage extends to every asset class,

market and industry sector imaginable. Public trading also makes them easily accessible to even small investors.

Secondly, investors can gain diversified exposure without the need for stock specific research and exposure to said risks. Some of the most actively traded ETFs are those investing in emerging markets such as China, India, Brazil, Russia, etc. In Hong Kong, the 12 Lyxor ETFs offer investors investment opportunities in markets such as Korea, India, Russia, emerging markets and global commodities.

Equitization Equitization generally refers to a timely act of converting cash into equity positions. Cash management is an important aspect of portfolio management. With their liquidity and trading convenience, many professional investors now use ETFs to equitize cash in a timely manner for cash management and liquidity.

A good example of effective cash management would be to park small dividend inflows to reduce the impact of cash drag. When the accumulated ETF

position becomes large enough, it would then be converted into a normal portfolio holding.

In another instance, managers of mutual funds habitually keep a small portion of the funds’ investments in cash to meet redemptions. Nowadays, they use ETFs instead of cash relying on the liquidity provided by the ETFs to meet unexpected redemptions while keeping their funds as fully invested as possible. Managers of small-cap stock funds are especially keen users of such strategies.

Alternative Investing New ETFs now cover non-traditional assets classes including commodities and REITs. Some ETFs even offer leveraged returns or inverse returns (same magnitude but opposite direction returns to short selling) on popular stock indices. There are also ETFs that are benchmarked to custom-designed indices that capture global market trends such as social responsibility, global warming, and natural resources like water and energy. Furthermore, ETFs

based on fundamental indices (akin to quantitative actively managed benchmarks) are becoming popular among U.S. investors.

As such, ETFs can be used as alternative investments providing investors with further diversification and adding performance to more conventional portfolios made up of the traditional asset classes of bonds, stocks and cash.



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Trad ing o f ETFs Trading of ETFs ETFs trade like stocks on exchanges during market opening hours. As such, ETFs are open to all investors. Investors buy and sell ETFs through any licensed stock broker and pay the same brokerage commissions and other transactional expenses related to trading on public exchanges.

In Hong Kong, transactional expenses include stamp duty and transaction fees. Due to the “foreign” nature of the underlying investments, all Lyxor ETFs listed in Hong Kong are exempted from stamp duty. Unlike traditional mutual funds, ETFs do not charge front-end commissions or exit fees.

To ensure the liquidity of ETFs, Hong Kong listed ETFs are required to appoint market makers which are usually large stock brokers or international broker dealers. Regardless of the prevailing trading volume on the exchange, ETF market makers are obliged to provide liquidity to investors by quoting two-way prices on a real time basis that are close to the iNAVs of the ETFs during market opening hours.

For Lyxor ETFs listed in Hong Kong, SG Securities (HK) Limited has been appointed the designated market maker.

Understanding ETF Pricing The trading of ETF units on an exchange is a straightforward affair. However, investors need to understand the meanings of the various “prices” and

how they relate to each other so as to ascertain the true value of their trades and investments.

What is Net Asset Value (“NAV”)? Similar to any traditional mutual fund, the NAV of an ETF is often quoted on a per unit basis. It represents the total value of all assets, including cash and any unpaid dividends, held by the ETF minus all accrued fees and expenses and then divided by the total number of outstanding units. NAVs are publicly published on a daily basis. The NAVs of Lyxor ETFs listed in Hong Kong can be found on our web site at

www.lyxoretf.com.hk, and on Bloomberg and Reuters.

The NAVs of ETFs are primarily affected by changes in the value of the portfolio of securities which reflect the value of the benchmark indices. Consequently, the NAV of an ETF should increase by approximately 10% if its benchmark index rises by 10%.



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What are Trading Prices? Trading prices refer to the prices that an ETF were bought and sold at while trading on an exchange. Under normal circumstances, the trading price of an ETF should be close to its iNAV, which is the estimated NAV of the ETF at the time of the calculation. However, as trading prices are influenced by the supply and demand situations in the marketplace, they may differ from the iNAVs.

Excess demand for ETF units will drive trading prices above the iNAV of an ETF and vice versa. When trading prices are above that of the iNAV, the ETF is trading at a premium. If the opposite is true, then the ETF is trading at a discount. Furthermore, trading

prices are likely to be farther away from its iNAVs when an ETF is trading out of the time zone of its underlying investments. For example, ETFs that invest in Asia will trade closer to their iNAVs during Asian trading hours than when they are trading in the U.S. when the Asian markets are closed.

Premiums and discounts reflect a temporary imbalance in supply and demand in the marketplace. Under normal circumstances, premiums and discounts can be effectively dealt with by Authorized Participants and/or market makers through the release, or buying back, of units from the market and the creation or redemption of ETF units.

What are iNAVs? iNAVs are the indicative NAVs of ETFs calculated throughout market opening hours giving the estimated NAV of the ETF portfolios at the time of calculation. iNAVs are published so that investors can compare them to the prevailing quotes and

trading prices of ETFs to determine whether an ETF is trading above or below its worth. iNAVs of all locally listed Lyxor ETFs are available at Lyxor ETF’s website at www.lyxoretf.com.hk.

Pricing Accuracy and Liquidity Most ETFs feature an open-ended structure so that ETF units can be created or redeemed. However, unlike traditional mutual funds, it is normal for ETFs to restrict the creation and redemption of units to selective financial institutions called Authorized Participants for operational efficiency reasons. Individual investors cannot create or redeem ETF units directly from the ETF Manager and can only trade them on exchanges.

ETFs feature a unique creation/redemption mechanism whereby creations and redemptions are normally done on an in-species basis and in relatively large amounts by Authorized Participants. The premiums and discounts on ETFs can be arbitraged away by Authorized Participants based on this unique mechanism. When a premium appears,

an Authorized Participant will be able to buy the basket of the underlying securities and execute a creation order at a cost close to the iNAV and sell the newly created ETF units at higher trading prices. In the case of a discount, an Authorized Participant will buy ETF units from the market at lower prices and execute a redemption order with the ETF.

Repeated arbitrage trades will soon shrink the trading prices back to a level close to the iNAV meaning that both the trading prices and liquidity of ETFs can thus be maintained. However, investors should be aware that some ETFs, especially those that invest in restrictive markets, may trade at persistent premiums or discounts reflecting the (inherent) inefficiencies of the underlying markets.



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Liquidity As ordinary investors rely on the secondary markets for the trading of ETF units, large securities houses or broker dealers are appointed as market makers to ensure that even small trades can be effected without resorting to creations and redemptions. ETF market makers are obliged to provide liquidity to investors by quoting prices on a real time basis that

are close to NAVs during market opening hours. However, investors should be aware that the spreads and sizes quoted will vary depending on the individual ETFs and whether the markets on which the underlying investments trade are open during Hong Kong trading hours.



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Mon i to r i ng o f ETFs One of the main advantages of ETFs over their traditional mutual fund counterparts is the public trading aspect of ETFs. A significant benefit that comes with public trading is the ready availability of information relating to the ETF such as product specification, holdings details, daily NAVs, performance, and trading volume.

Monitoring ETF Environment: Stockbroker websites

Listing exchange website, e.g. www.hkex.com.hk.

ETF manager website, e.g. www.lyxoretf.com.hk.

Financial information vendors, e.g. Bloomberg, Reuters, Morning Star, etc.

Newspapers

TV

Key Information of ETFs: Fund prospectus

Monthly fact sheet

Benchmark index

Management fee

Trading symbols

Daily NAV

iNav

Bid/offer quotes

Trading prices

Trading volume

Performance

Perfect Basket

Investors can obtain specific information about Lyxor ETFs at the Lyxor ETF website at www.lyxoretf.com.hk and the HKEx website at www.hkex.com.hk.



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Lyxor ETFs’ homepage:

Product’s page:



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Glossa ry Asset Class A classification or categorization of different types of assets. The most common assets classes are equities, bonds, cash, commodities, and real estate.

Asset allocation The process of apportioning investments among various asset classes such as stocks, bonds, commodities, real estate, collectibles, and cash equivalents. Asset allocation affects both the risk and return of an investment portfolio, and is often used as a core strategy in basic financial planning.

Authorized Participants Usually large financial institutions which have signed agreements with an ETF or the Manager of an ETF allowing them to create and redeem ETF units in large blocks.

Benchmark index The index against which a particular ETF will try to replicate its performance. Benchmark indices are usually well-known, diversified indices that represent a region, a country or specific market sectors. Most benchmark indices are available upon subscription and many are published live on the websites of information vendors such as Reuters and Bloomberg.

Bid/offer quotes Indicative values quoted on an exchange at which trades may be executed. The bid is the price at which someone is willing to buy the security. The offer is the price at which someone is willing to sell the security.

Cash drag The adverse impact, or drag, cash holdings will impart on a portfolio in a rising market.

Collective investment schemes Here, refers to those schemes that are authorized by the Securities & Futures Commission in Hong Kong.

Creation In the case of mutual funds, to create units is to increase the number of outstanding mutual fund units.

Discount The difference in value when the trading price is below the NAV.

Dividend A distribution of earnings paid out to shareholders or mutual fund unit holders. With mutual funds and ETFs, dividends can be derived from capital gains, interest income and dividends received from securities held within the portfolio. Dividends are paid regularly but the frequency of payment can vary from fund to fund.

Equity-linked swaps (“ELS”) An OTC agreement between contracted parties. In risk terms, ELS ranks as pari passu with other unsecured obligations such as common bonds (i.e. same rights to payments). In ELS, the issuer promises to pay the holders a variable return based on a predetermined benchmark index. In case of bankruptcy, both bonds and ELS rank higher than common stocks in claims against the issuer.

Hedging An investment strategy used to reduce financial risk or the possibility of loss. A classic example of hedging against the risk of a market decline is to sell short the market’s index futures or the ETF benchmarked to that market index.

Index-tracking Or, passive management, is an investment strategy that aims to replicate the performance of a pre-determined benchmark index.

In-species creation/redemption The delivery of a portfolio of stocks to the fund for creation of new units instead of cash and vice versa.

Intraday During the market opening hours of a trading day. The term is most often used in relation to securities that trade on exchanges.



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Liquidity

The condition where one can buy or sell an asset without substantially affecting the asset’s price. In securities trading, those with limited trading activity as represented by trading volume are generally considered illiquid. Liquidity in ETFs, when viewed in terms of the ease of buying and selling, is bigger than the trading volume shown on the exchange because of the open-ended nature of ETFs. That is, units can be created or redeemed, and market makers can be appointed to facilitate trading.

Market maker Usually large financial institutions such as securities houses or international broker dealers appointed by ETF Managers to facilitate trading and liquidity. Regardless of the trading volume on the exchanges, ETF market makers are obliged to provide liquidity to investors by providing two-way quotes on a real time basis.

Mutual fund A type of investment product that pools the money of those with the same investment objectives into a single investment vehicle. Since mutual funds can be offered to the public in most countries, they are strictly regulated. All mutual funds have stated investment objectives and are managed by professional investment managers.

Open-ended funds Mutual funds that allow subscriptions and redemptions on a continuous basis. Most traditional mutual funds feature daily opening. In the case of ETFs, creation and redemption can be performed by Authorized Participants throughout the trading day.

Participating Dealers A term often used in Asia in place of Authorized Participant.

Perfect Basket A portfolio of stocks that reflects the constituent stocks of the benchmark index. During the creation of

ETF units, a perfect basket (or multiple of which) will have to be delivered to the ETF and vice versa.

Premium Excess value when the trading price is above the NAV.

Redemption In case of mutual funds, to redeem units is to decrease the number of outstanding mutual fund units.

Tracking Error In laymen’s terms, the difference in performance between the fund and its benchmark index. The academic definition of tracking error is the standard deviation or volatility of the difference between the returns of the fund and its benchmark index.

Trading symbol Symbols or codes used to identify stocks, mutual funds, ETFs and any other listed investment instruments on stock exchanges. In Hong Kong, listed securities can be identified by their stock codes which are composed of a 4-digit number.

Transparency Visibility level of securities holdings within a given portfolio or fund. Generally the transparency of an index fund will be greater than an actively managed fund. This is due to the fact that holdings within the index fund are openly disclosed and available.

Total Expense Ratio (“TER”) The all-in fee that an ETF will pay to the Manager from which the Manager will pay all other fees and expenses.

Two-way quotes Please refer to bid/offer quotes.

Volatility The rise and fall in price movement of a security. Securities that rise or fall rapidly within a short time frame are considered more volatile than those that don’t.



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Disc la ime rs Investments involve risks. Investments in emerging markets or commodity involve higher risks. This document has been provided for informational purposes only and does not constitute an offer or solicitation to purchase or sell units in each Lyxor ETF. Past performance is not indicative of future performance. Investor should read the relevant prospectus carefully including the investment objective and risk factors relating to each Lyxor ETF, including counterparty risks and the arrangement in the event that the Lyxor ETF is delisted. Societe Generale will be acting as the counterparty to the swap agreement. Copies of the Prospectuses of the Lyxor ETFs are available on www.lyxoretf.com.hk or www.hkex.com.hk. Investor should note that an ETF differs from a typical unit trust as units may only be redeemed by participating dealers in large creation/redemption unit sizes. The market price of a Lyxor ETF trading on the HKEx may be different from the net asset value per unit of the same Lyxor ETF. Transaction in units of Lyxor ETFs will result in brokerage commissions.

Con tac t De ta i l s Web Site: www.lyxoretf.com.hk

Tel: +852 2166 4266

e-mail: [email protected]

2008

/05

lyxor guide

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