Investors seeking less-risky exposure to the Hong Kong stock market might consider exchange-traded funds (ETFs) that give U.S. investors broad ownership of Chinese stocks. While China currently is in a massive COVID-19-created recession, the world's second-largest economy is expected to return to rapid growth. For U.S. investors, an increase in trading in recent years between stock markets in China and Hong Kong has not necessarily meant easier access to the main Hong Kong index, the Hang Seng Index (HSI). There are only 3 ETFs focused on Hong Kong-listed stocks, though none of them tracks the Hang Seng. Fortunately, these 3 funds provide U.S. and other outside investors a reasonable substitution via indexes that mirror the overall performance of Chinese equities. Investors considering these funds should keep in mind the heightened volatility and uncertainty facing Hong Kong's markets due to the Chinese government's political crackdown.
- The MSCI Hong Kong index has significantly underperformed the broader market in the past year.
- The 3 ETFs focused on Hong Kong stocks and that trade in the U.S. are ZHOK, FLHK, and EWH.
- The top holding for each of these funds is AIA Group Ltd.
The Hong Kong stock market has significantly underperformed the broader market in the past year. The MSCI Hong Kong Index has provided a 1-year trailing total return of 3.2% compared with 22.9% for the S&P 500. Note that the MSCI Hong Kong Index tracks large-cap and mid-cap stocks making up 85% of the companies on the Hang Seng. As a result, the MSCI provides a rough substitution for the Hang Seng except for the smallest companies that make up 15% of the index. The best Hong Kong ETF, based on performance over the past year is the SPDR Solactive Hong Kong ETF (ZHOK). Below, we'll look at three Hong Kong ETFs for Q4 2020 as measured by 1-year trailing total returns. Benchmark returns above are as of September 1 and all other data are as of September 2, 2020.
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.
- 1-Year Trailing Total Return: 5.8%
- Expense Ratio: 0.14%
- Annual Dividend Yield: 2.35%
- 3-Month Average Daily Volume: 1,518
- Assets Under Management: $13.8 million
- Inception Date: September 18, 2018
- Issuer: State Street SPDR
ZHOK is a large-cap blended fund which tracks the Solactive GBS Hong Kong Large & Mid Cap Index. This index is a free float-adjusted market cap index which aims to capture the market performance of large- and mid-cap companies listed in Hong Kong. The fund offers broad exposure to common and preferred stocks, REITs, ADRs, and other categories of equities. The top holdings for ZHOK include AIA Group Ltd. (1299), the insurance and financial services firm; Hong Kong Exchanges and Clearing Ltd. (388), the owner and operator of stock and futures exchanges and clearing houses; and CLP Holdings Ltd. (2), the electricity supplier and energy generation company.
- 1-Year Trailing Total Return: 5.3%
- Expense Ratio: 0.09%
- Annual Dividend Yield: 2.74%
- 3-Month Average Daily Volume: 862
- Assets Under Management: $18.2 million
- Inception Date: November 2, 2017
- Issuer: Franklin Templeton Investments
FLHK is a large-cap blended fund tracking the FTSE Hong Kong Capped Index. This index is a market-cap-weighted index representing the performance of large- and mid-cap Hong Kong-listed stocks. FLHK has a relatively low expense ratio, as the fund aims to provide low-cost exposure to some of the largest Hong Kong companies. The fund weighs its holdings such that the top two companies in its portfolio currently represent nearly a third of invested assets. The top holdings of FLHK include AIA Group; Hong Kong Exchanges and Clearing; and Sun Hung Kai Properties Ltd (16), which operates and manages hotels, car parking, and other properties.
- 1-Year Trailing Total Return: 2.7%
- Expense Ratio: 0.49%
- Annual Dividend Yield: 2.70%
- 3-Month Average Daily Volume: 5,205,889
- Assets Under Management: $1.3 billion
- Inception Date: March 12, 1996
- Issuer: iShares
EWH is by far the largest and most liquid of the 3 Hong Kong ETFs we examine. This fund tracks the MSCI Hong Kong Index, a market cap-weighted index made up of a diverse selection of large- and mid-cap stocks primarily traded on the Hong Kong Stock Exchange and our benchmark from above. The fund's holdings are dominated by financial-sector stocks. Like FLHK, EWH currently concentrates roughly a third of its invested assets in the top two stocks in its portfolio. The top holdings for EWH include AIA Group; Hong Kong Exchanges and Clearing; and Sun Hung Kai Properties.