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 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 severely limited air travel into the city, threatening its position as a top aviation hub and further harming Hong Kong's economy.
Despite these negative trends, Hong Kong still remains open for business and investor capital, with ETFs offering one way to gain diversified exposure to what continues to be a leading financial center in the global economy.
Hong Kong's economy has done relatively well amid the global pandemic. In Q4 2021, Hong Kong's gross domestic product (GDP) grow 4.8% year-over-year, driven by improved private consumption and strong exports. For full year 2021, real GDP grew by 6.4%, and Hong Kong's government forecasts the economy will grow by as much as 3.5% in 2022.
- Hong Kong equities significantly 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 significantly underperformed the U.S. equity market over the past 12 months, with a total return of -19.6% compared with the S&P 500’s total return of 3.9%, as of April 28, 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 April 28, 2022.
- Performance Over One-Year: -19.8%
- Expense Ratio: 0.50%
- Annual Dividend Yield: 2.46%
- Three-Month Average Daily Volume: 4,278,960
- Assets Under Management: $802.5 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. EWH follows a blended strategy, investing in value and growth stocks. Real estate, insurance, and capital goods stocks are the three largest components of the portfolio.
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 CK Hutchison Holdings Ltd. (1:HKG), a holding company and port investor, owner, and operator.
- Performance Over One-Year: -22.5%
- Expense Ratio: 0.09%
- Annual Dividend Yield: 3.18%
- Three-Month Average Daily Volume: 2,167
- Assets Under Management: $16.4 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. Over 85% of FLHK’s holdings are companies domiciled within Hong Kong, which is part of China as a special administrative region (SAR). Nearly 12.0% of the companies in the portfolio are headquartered in other parts of China, followed by Macau (another China SAR), and other nations. 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., all described above.
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