Cross The Wall Of China, Invest In Hong Kong ETFs

After sluggish trading in the last few weeks, the Hong Kong stock market has regained focus and the country’s major benchmark is hovering around its seven-year high. The strength came on the back of a surging Chinese market, and the new cross-border investment scheme announced in the weekend.

The new scheme would allow the sale of mutual funds domiciled in Hong Kong and China in each other’s market effective July 1. This would result in huge money inflows from the mainland to the Hong Kong market, and drive the stocks higher (read: Hong Kong Stocks Hit 7-Year High: 3 ETF to Watch).

The move came a few months after the launch of the Shanghai-Hong Kong Stock Connect program in November that allows direct trading of Shanghai shares by investors outside mainland China for the first time with an aggregate quota of 300 billion yuan ($47.9 billion). The mutual fund scheme when combined with this trading link program could increase the total flow to about $180 billion from China to the Hong Kong market, as per Goldman Sachs.  

Further, the roll out of a new stock-connect program between Hong Kong and Shenzhen – in the pipeline for this year – will continue to fuel a rally in the Hong Kong stocks. To make the case stronger, the monetary policy easing spree in China, such as cuts in reserves requirement ratio and interest rates, and hopes for further acceleration in reforms will continue to build up momentum in the world’s second largest economy and the stocks (read: Fresh China Rate Cut Lifts A-Shares ETFs).

Apart from these, a continued solid-run in the mainland Chinese stocks make Hong Kong stocks attractive at the current levels. This is especially true given that the Shanghai Composite Index has rallied nearly 52% in the year-to-date timeframe while Hong Kong’s Hang Seng Index has risen only 20% in the same time frame. This has resulted in a massive discount for the Hong Kong stocks.

As the Chinese companies trading in Hong Kong try to catch up with their surging onshore counterparts, the gap between the two indices will narrow, pushing the Hong Kong shares higher. Given this and the bullish outlook, investors could tap this opportunity and make a play on the Hong Kong market through these three ETFs.

iShares MSCI Hong Kong ETF ((EWH - ETF report))

This fund is by far the most popular and liquid ETF tracking the Hong Kong economy with AUM of over $3.6 billion and average daily volume of about 3.2 million shares. It follows the MSCI Hong Kong Index and charges 48 bps in fees per year from investors. In total, the fund holds 40 securities in its basket. It is heavily concentrated on the top firm – AIA Group (AIA) – at 17.6% while other firms hold less than 8.1% share (see: all the Developed Asia Pacific ETFs here).

From a sector look, real estate is the top sector at 30.3%, closely followed by insurance (17.6%) and utilities (11%). The ETF has gained 19.4% over the year-to-date period and has a Zacks ETF Rank of 2 or ‘Buy rating with a Medium risk outlook.

First Trust Hong Kong AlphaDEX Fund ((FHK - ETF report))

This fund currently tracks the Defined Hong Kong Index and employs an AlphaDEX methodology. It ranks stocks in the space by various growth and value factors, eliminating the bottom-ranked 25% of the stocks. This approach results in a basket of 40 stocks that are skewed toward the top firm – Goldin Financial Holdings – at 8.3%. Other firms hold no more than 4.17% share in the basket.

More than half of the portfolio is allocated to financials, while industrials, consumer discretionary and utilities round off the next three spots. The fund has AUM of $239.6 million and charges 80 bps in annual fees and expenses. Volume is light, trading under 44,000 shares per day on average. The fund has added 18.1% so far in the year and has a Zacks ETF Rank of 3 or ‘Hold’ rating with a Medium risk outlook (read: 3 Asia-Pacific ETFs Celebrate Best Quarterly Gains in 3 Years).

iShares MSCI Hong Kong Small-Cap ETF ((EWHS - ETF report))

Unlike the other two, this is a small cap centric fund. It is unpopular and less liquid having AUM of $9.3 million and average daily volume of about 9,000 shares. The fund tracks the MSCI Hong Kong Small Cap Index while charges 59 bps in annual fees.

Holding 90 stocks, the product does a decent job of spreading out assets as each company holds less than 4% of the total. However, it is slightly concentrated from a sector look as consumer discretionary takes the top spot at 32.2% while financials and industrials round off to the next two spots at 27.5% and 16.3%, respectively. The product is up 19.3% in the year-to-date timeframe and has a Zacks ETF Rank of 3 with a Medium risk outlook.

In Conclusion

The bullish trend in these ETFs will likely continue in the coming months given that these offer investors the best bargains after an astounding rally in the domestic Chinese market.  

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