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 continued to do so during the initial two decades after it became a semiautonomous region of China in 1997. But during the past several years, the combination of the COVID-19 pandemic and an increasingly severe crackdown by China’s central government on Hong Kong’s democratic institutions has threatened its status as a financial hub. More recently, strict government COVID-19 regulations have prompted a second recession within three years.
Despite these negative trends, Hong Kong remains attractive to many investors. ETFs offer one way to gain diversified exposure to what continues to be a leading financial center.
As mentioned, Hong Kong's economy has been impacted by its ongoing COVID-19 pandemic restrictions. Hong Kong’s gross domestic product (GDP) declined by 1.3% year over year (YOY) in Q2 2022 after declining 3.9% in the first quarter. Due to the worsening outlook for the global economy, Hong Kong's government on Aug. 12 sharply lowered its growth forecasts for all of 2022. It now expects growth ranging between -0.5% and 0.5%.
- Hong Kong equities underperformed the broader U.S. stock market over the past year.
- Two Hong Kong exchange-traded funds (ETFs) trade in the United States: EWH and FLHK.
- 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 -16.1% compared with the S&P 500 Index’s total return of -5.4%, as of Aug. 22, 2022. The best-performing Hong Kong ETF, based on performance over the past year, is the iShares MSCI Hong Kong ETF (EWH).
We look at both Hong Kong ETFs below. All numbers below are as of Aug. 22, 2022. In order to focus on the funds' investment strategy, the top holdings listed for each ETF exclude cash holdings and holdings purchased with securities lending proceeds except under unusual cases, such as when the cash portion is exceptionally large.
- Performance Over One Year: -17.1%
- Expense Ratio: 0.50%
- Annual Dividend Yield: 2.46%
- Three-Month Average Daily Volume: 3,285,866
- Assets Under Management: $746.5 million
- Inception Date: March 12, 1996
- Issuer: BlackRock Financial Management
EWH tracks the MSCI Hong Kong 25/50 Index, an index designed to gauge the performance of the midcap and large-cap segments of the Hong Kong equity market. This fund is much larger and more liquid than FLHK, its counterpart, but it’s also more expensive.
The fund’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 operator of equity, commodity, fixed income, derivatives, currency, and other markets; and Techtronic Industries Co. Ltd. (669:HKG), a maker of power and hand tools, and related appliances.
- Performance Over One Year: -19.2%
- Expense Ratio: 0.09%
- Annual Dividend Yield: 3.18%
- Three-Month Average Daily Volume: 2,112
- Assets Under Management: $12.9 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 midcap 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 fund’s largest exposure is to the financial sector, followed by real estate and industrials.
FLHK’s top three holdings are AIA Group; Hong Kong Exchanges & Clearing; and CK Hutchison Holdings Ltd. (1:HKG), a port investor and developer.
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