Investors seeking exposure to the Hong Kong stock market might consider exchange-traded funds (ETFs). Historically, Hong Kong has thrived as a global financial center and capitalist economy, and it largely has continued to do so since it became a semi-autonomous region of China in 1997. But during the past two years, Hong Kong’s democratic government and economy have been badly weakened by the COVID-19 pandemic and a major political crackdown from the Communist government in Beijing. Businesses have closed and politicians have been arrested. Hong Kong suffered a 6.1% decline in GDP last year, its biggest decline ever, while the financial hub also is seeing its biggest population drop in decades as residents seek to escape political repression. Developments like this are increasing doubts about Hong Hong’s future role as a global financial hub.
One positive sign for investors is that Hong Kong forecasts the economy will rebound this year, expanding 6.5%.
Despite these disruptions, Hong Kong still remains open for business and investor capital, with ETFs offering perhaps the best way to gain diversified exposure to this leading financial center in the global economy.
- Hong Kong equities underperformed the broader U.S. stock market over the past year.
- Two Hong Kong exchange-traded funds (ETFs) trade in the U.S: FLHK and EWH.
- The top holding for each of these ETFs is AIA Group Ltd.
Just two distinct Hong Kong ETFs trade in the United States, excluding inverse and leveraged ETFs. Hong Kong equities, as measured by the MSCI Hong Kong Index, have underperformed the U.S. equity market over the past 12 months, with a total return of 15.6% compared to the S&P 500’s total return of 41.2%, as of Oct. 29, 2021. The best-performing Hong Kong ETF, based on performance over the past year, is the Franklin FTSE Hong Kong ETF (FLHK).
We look at both Hong Kong ETFs below. All numbers below are as of Oct. 28, 2021.
Exchange-traded funds (ETFs) with very low assets under management (AUM), less than $50 million, usually have lower liquidity than larger ETFs. This can result in higher trading costs, which can negate some of your investment gains or increase your losses.
- Performance Over One-Year: 18.4%
- Expense Ratio: 0.09%
- Annual Dividend Yield: 3.14%
- Three-Month Average Daily Volume: 3,279
- Assets Under Management: $19.6 million
- Inception Date: Nov. 2, 2017
- Issuer: Franklin Templeton
FLHK tracks the FTSE Hong Kong Capped Index, a market capitalization-weighted index representing the performance of mid- and large-cap Hong Kong-listed stocks. The ETF follows a blended strategy, providing exposure to a mix of growth and value stocks at a relatively low cost. The majority of FLHK’s holdings are companies domiciled within Hong Kong. That said, China-based companies account for nearly 13% of the fund’s total assets, while there’s also a very small portion of stocks based in Macao, Italy, Singapore, Luxembourg, and several other countries. The fund’s largest exposure is to the financial sector, followed by real estate and industrials.
FLHK’s top three holdings are AIA Group Ltd. (1299:HKG), a provider of insurance and financial services; Hong Kong Exchanges & Clearing Ltd. (388:HKG), an owner and operator of stock and futures markets; and Techtronic Industries Co. Ltd. (669:HKG), a multinational manufacturer of power tools, hand tools, outdoor equipment, and more.
- Performance Over One-Year: 16.1%
- Expense Ratio: 0.51%
- Annual Dividend Yield: 2.45%
- Three-Month Average Daily Volume: 4,707,871
- Assets Under Management: $967.8 million
- Inception Date: March 12, 1996
- Issuer: BlackRock Financial Management
EWH is much larger and more liquid than FLHK, but it’s also more expensive. This ETF tracks the MSCI Hong Kong 25/50 Index, an index designed to gauge the performance of the large- and mid-cap segments of the Hong Kong equity market. It follows a blended strategy, investing in both value and growth stocks, and real estate, insurance, and diversified financial stocks are the three largest components of the portfolio. The fund’s top three holdings are AIA Group Ltd.; Hong Kong Exchanges & Clearing Ltd.; and Techtronic Industries Co. Ltd., all described above.
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