Hong Kong ETFs: What They Are and How They Work

What Are Hong Kong ETFs?

Hong Kong exchange-traded funds (ETFs) track the performance of Hong Kong equities and other assets, usually through indexes tied to the market. These indexes can range from the broader market to specific sectors within the Hong Kong economy.

Like other ETFs, Hong Kong ETFs are traded on stock exchanges, offering exposure to the Hong Kong market without the need to buy individual securities.

How Hong Kong ETFs Work

Hong Kong ETFs work by tracking a particular index representing a segment of the Hong Kong stock market. This is done by buying all or a representative group of the securities in the underlying index. The ETF’s price fluctuates throughout the trading day, like individual stocks, and most ETFs are highly liquid.

Key characteristics of Hong Kong ETFs include their performance, which reflects the underlying index’s return, and their expense ratio, which is the annual fee charged to investors. In addition, each ETF has specific holdings (the individual securities it owns) and sector allocations (how its assets are distributed across different sectors). Other important factors include trading volume (how frequently shares are bought and sold) and tracking errors (how closely the ETF follows its index). These collectively determine the suitability of a particular Hong Kong ETF for you.

Benefits of Investing in Hong Kong ETFs

Investing in Hong Kong ETFs offers several benefits.

A primary advantage is diversification. By investing in a Hong Kong ETF, you get direct exposure to a broad range of companies within the Hong Kong market, spreading your risk across many stocks rather than relying on the performance of a single company or a smaller number of shares. This can be worthwhile for those seeking broad international diversification in their portfolios.

It’s also a chance to benefit from the attractive potential of the Hong Kong market. Hong Kong is a leading financial center with a dynamic and robust economy. Investing in a Hong Kong ETF allows investors to participate in this growth.

In addition, ETFs offer advantages such as liquidity (generally, easy trading throughout the trading day), transparency (holdings are disclosed daily), and lower costs than mutual funds.

Top Hong Kong ETFs

The two top Hong Kong ETFs available in U.S. markets are the iShares MSCI Hong Kong ETF (EWH) and the Franklin FTSE Hong Kong ETF (FLHK).

EWH has about $600 million in net assets as of late January 2024 and is the oldest and largest Hong Kong ETF. It aims to replicate the performance of the MSCI Hong Kong Index, providing exposure to large and midsized Hong Kong companies. EWH comes with an expense ratio of 0.50%.

FLHK tracks the FTSE Hong Kong Capped Index, and its inception was in 2017. Its assets under management are significantly smaller than EWH: about $10.86 million as of late January 2024.

What to Consider When Choosing a Hong Kong ETF

When choosing a Hong Kong ETF, several factors should be considered.

First, the fund’s objective is crucial since it should align with your investment goals. Holdings are another critical aspect, as they represent the ETF’s assets. Liquidity is also essential, as it determines how easily an investor can trade shares of the ETF. The provider’s size, scale, expertise, and commitment can also impact your investment, so these should also be considered.

Evaluating an ETF’s performance and track record is an essential step. This includes understanding the performance of the ETF, the underlying index it tracks, and how it does so. Also, review the ETF’s costs. Remember that past performance is not a guarantee of future results, and your choice should fit your risk tolerance and investment goals.

How to Invest in Hong Kong ETFs

Investing in Hong Kong ETFs can be done simply through a brokerage account. You need to open an account with a broker that provides access to international markets, including Hong Kong. Ensure that the broker you choose is regulated and has a good reputation. Research the available Hong Kong ETFs, assessing fund objectives, holdings, liquidity, performance track record, and fees.

To buy shares in a Hong Kong ETF, follow these steps: Log into your brokerage account, search for the ticker symbol of the ETF you’re interested in, specify the number of ETF units you want to buy, and submit your order. Remember to conduct due diligence beforehand, review your transactions, and check your investments regularly.

Risks and Challenges of Investing in Hong Kong ETFs

Investing in Hong Kong ETFs offers the chance to tap into a dynamic financial market. Before doing so, however, understanding the specific risks and market dynamics of Hong Kong is essential.

Hong Kong is a global financial powerhouse, renowned for its high degree of internationalization and its role as a critical gateway for investments in and out of China. Its gross domestic product (GDP) in 2002, according to The World Bank, was $166.35 billion, climbing to $359.84 billion by 2022, in 2022 U.S. dollars.

Hong Kong operates under a distinct system from mainland China, yet Chinese economic policies and developments profoundly impact its economy. This complex interdependence underscores the importance for investors to watch political and economic changes in China, given their significant influence on Hong Kong’s market. Additionally, Hong Kong’s role as a critical gateway to Chinese and other Asian markets extends its economic influence far beyond what is reflected in its GDP alone.

The real estate sector, a significant part of Hong Kong’s economy, is characterized by high property prices and a market that can significantly drive economic growth, offering attractive prospects in related ETFs. As a pivotal trading hub, Hong Kong’s reliance on trade, especially with mainland China and other Asian countries, underscores the importance of global trade for its market performance.

Investors must also navigate currency risks with the Hong Kong dollar’s peg to the U.S. dollar. This peg affects monetary policy and can influence inflation and interest rates, impacting investment returns.

Hong Kong’s traditional appeal has been its free-market policies, low taxation, and minimal government intervention. However, the evolving political landscape and recent changes in security laws pose potential risks that could alter this environment.

The focus on technology in Hong Kong, fueled by government initiatives aimed at economic diversification, presents new avenues for ETF investment. This shift toward a more innovation-driven economy could redefine traditional investment strategies.

Fueled by local and global events, market volatility remains a crucial consideration. Political shifts, policy changes, and global economic trends can all significantly influence the value of Hong Kong ETFs. China’s global financial influence, particularly the role of Hong Kong as an international financial center, is crucial. The dynamics of the yuan exchange rate and China’s economic growth rate are also important to assess.

In light of these risks and prospects, a well-diversified portfolio is key. Regular monitoring, staying informed about global and local developments, and strategic use of stop-loss orders can help mitigate potential losses.

The Bottom Line

Hong Kong ETFs offer advantages like diversification, transparency, and the opportunity for international market exposure. They provide investors access to Hong Kong’s economy and can be traded on stock exchanges.

Before investing, interested investors should conduct due diligence and consider expense ratio, performance, size, liquidity, and Hong Kong-specific risks.