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A Handy Guide to ETFs in Hong Kong

ETFs are a great way for beginners to build diversified portfolios and achieve stable returns over the long term.  Investors often complain, however, that Hong Kong ETFs lack liquidity and variety.

Such complaints do not withstand scrutiny.

Compared to the U.S. market, it’s true that Hong Kong has fewer ETFs for different industries. But it does offer plenty of ETFs for various asset types, investment strategies, and geographical areas. As for the insufficient liquidity complaint, that’s just a myth.

Low transaction volume does not mean low liquidity…Well, at least for ETFs

According to a local think tank, 47% out of the total 177 ETFs in the Hong Kong market recorded zero transactions on a typical trading day (19 Dec 2016). Low daily transaction volumes are still characteristic of many Hong Kong ETFs today. This scares many beginners away from investing in Hong Kong ETFs. Being more familiar with equities, beginners understandably fear that low daily transaction volumes will prevent investors from buying or selling the ETF in a timely fashion.

This view doesn’t account for the fact that market makers provide liquidity and price efficiency in the ETF market. Authorized market makers are obligated to make a bid or ask, within a reasonable spread of the underlying asset value of the ETF, to willing sellers or buyers if they are unable to find counterparties. Quite simply, the presence of market makers in the ETF market ensures efficiency in the ETF market, even when buying and selling orders are limited.

ETFs in Hong Kong by industry––– the trio

The criticism on the limited availability of ETFs for different industries is fair. Just three industry-specific ETFs exist in the Hong Kong market. One tracks Hong Kong bank stocks, another track Asia-Pacific property developers, and a third tracks Hong Kong and Mainland property developers. Nevertheless, ETFs in Hong Kong do have more variety in terms of geography, asset types, and strategies.

ETFs in Hong Kong by geography––– around the world in 80 days

Hong Kong investors can diversify their portfolios by investing in ETFs that hold or track underlying assets in different countries. Besides ETFs that track the global stock market and––– of course––– the Hong Kong market, there are ETFs that track the stock markets in China, Taiwan, Greater China, ASEAN countries, Asia ex-Japan, Japan, Korea, India, Europe, the UK, Germany, Russia, Brazil, and many Southeast Asian countries.

Currency risk often adds uncertainty to investing in the equities of different countries. Some geographical ETFs in Hong Kong actually hedge the currency risks, while some do not.

ETFs in Hong Kong by asset type

Risk-averse investors or investors seeking to build a truly diversified portfolio often want to invest in asset classes beyond equities. The Hong Kong ETF market meets the needs of those investors.

For commodities, there are gold and oil ETFs. For fixed income, there are ETFs for Hong Kong bonds, Chinese government bonds, Asian government bonds, and a hybrid ETF for Asian government and investment-grade corporate bonds. There is even an ETF focused on Hong Kong dollar money market funds.

ETFs in Hong Kong by strategy

Some ETFs feature specific investment strategies. In Hong Kong, there are ETFs that target high dividends, large-caps, small-caps, and value stocks. There are also leveraged ETFs which give double the daily returns (or losses) of a particular index. For pessimists, there are inverse ETFs which short the Hang Seng Index, the Hang Seng China Enterprises Index, the S&P500, and the Nasdaq100.

The cheat sheet

Here is a quick summary of the variety of ETFs in Hong Kong market[i]:

[i]See HKEX: https://www.hkex.com.hk/Market-Data/Securities-Prices/Exchange-Traded-Products?sc_lang=en

By industry Banks

Asia-Pacific property developers

Hong Kong and Mainland China property developers

By geography Global

Hong Kong

China

Taiwan

Greater China

ASEAN

Asia ex-Japan

Japan

Korea

India

Indonesia

Malaysia

Philippines

Singapore

Thailand

Vietnam

Europe

UK

Germany

Russia

Brazil

By asset type Gold

Oil

Hong Kong bonds

Chinese government bonds

Asian government bonds

Asian government and investment-grade corporate bonds

HKD money market fund

By strategy High dividend

Large-cap

Small-cap

Value

Leveraged

Inverse on HSI

Inverse on HSCEI

Inverse on S&P500

Inverse on Nasdaq100

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Want to know more about the Hong Kong market?

There are lots of myths that could stop us from being successful investors. In Hong Kong, we might have the impression that people generally get rich by buying property. But is real estate the best-performing asset class?

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