Investors seeking exposure to the Hong Kong stock market might consider exchange-traded funds (ETFs). Hong Kong has long thrived as a global financial center and open capitalist economy, and it largely has continued to do so since it became a semi-autonomous region of China in 1997.
Beijing initially allowed Hong Kong to maintain its Western-style political system under the central government’s “one country, two systems” approach. But now, political unrest and Beijing’s continued tightening of control over democratic freedoms in Hong Kong threaten the former British colony’s political and economic autonomy.
One recent sign of diminishing freedoms occurred in April 2021, when Hong Kong’s Legislative Council passed a law that made it significantly easier for the government to quickly block Hong Kongers from leaving, expanding the scope of last year’s national security law. Developments like this are raising questions over Hong Kong’s future role as a global financial hub.
However, for now at least, Hong Kong 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 United States: 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 27.6% compared to the S&P 500’s total return of 36.3%, as of Aug. 3, 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 are as of Aug. 4, 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: 24.8%
- Expense Ratio: 0.09%
- Annual Dividend Yield: 2.96%
- Three-Month Average Daily Volume: 1,080
- Assets Under Management: $16.9 million
- Inception Date: Nov. 2, 2017
- Issuer: Franklin Templeton
FLHK tracks the FTSE Hong Kong RIC 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 just over a tenth of the fund’s total assets, while there’s also a very small portion of stocks based in Cambodia, Indonesia, Italy, Luxembourg, Macao, Singapore, Taiwan, and the United States. 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: 23.1%
- Expense Ratio: 0.51%
- Annual Dividend Yield: 2.29%
- Three-Month Average Daily Volume: 4,615,777
- Assets Under Management: $1.1 billion
- 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 all of the fund’s holdings are essentially domiciled in Hong Kong.
Real estate companies are given the largest allocation in the portfolio, followed by insurance companies and diversified financials. 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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