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China Pessimists Should Look at this Hong Kong ETF

ETFs are great for passive, long-term investors who lack the time to pick stocks. The most common and popular ETF to gain exposure to the broad Hong Kong equity market is the Tracker Fund (SEHK: 2800), which tracks the Hang Seng Index. Yet many famous market commentators have warned that Hang Seng Index is increasingly weighted towards mainland enterprises – and thus, less and less representative of the local Hong Kong economy. For China pessimists, the AMUNDI HK35(SEHK: 3012) is the perfect ETF to gain exposure to a broad range of truly local and international enterprises based in Hong Kong.

The local taste

AMUNDI HK35 holds stocks that have local or international businesses more closely tied to the Hong Kong economy, with little China exposure. Below is a list of top 10 holdings of this ETF as of 14 March 2019:

Source: Amundietf.com.hk

All the top 10 holdings conduct either local businesses or international businesses that are heavily anchored to Hong Kong (like HSBC and AIA). The other 25 holdings are pretty much local Hong Kong or Macau (gaming) businesses, with a few small exceptions. Investors in this ETF can rest assured that they are exposed to some truly local elite Hong Kong or international businesses, without worrying about many of the corporate governance and high-debt issues prevalent in Mainland enterprises.

Many Mainland developers such as China Resources Land (SEHK: 1109) and Country Garden Holdings (SEHK: 2007) have highly leveraged businesses (high debt to asset ratios). Meanwhile, the high bad debt provision problem constantly plagues the valuations of Mainland state-owned banks such as China Construction Bank (SEHK: 939) and Bank of China (SEHK: 3988). Other Mainland businesses and conglomerates have corporate governance issues arising from time to time that are high-profile targets for short selling institutes; short selling reports on AAC Technologies Holdings (SEHK: 2018) in 2017 and Hengan Intl Group (SEHK: 1044) in 2018 still bring vivid memories to investors. All these Mainland stocks are constituents of Hang Seng Index and stocks held by the Tracker Fund.

Meanwhile, avoiding the Mainland enterprises, Amundi HK35 still hold many quality local and international businesses with a promising long-term prospect. AIA Group (SEHK: 1299) poses strong growth in value of new business (VONB) almost every year; CLP Holdings (SEHK: 2) and Hong Kong & China Gas (SEHK: 3) are typical utility companies with stable and constant business growth every year; HKEX (SEHK: 388) is a financial company of its own kind, providing the monopoly platform to list companies and trade listed companies in Hong Kong.

AMUNDI HK35 vs. EWH

Another ETF with a longer history that also invests in businesses tied to the local Hong Kong economy is the iShares MSCI Hong Kong Index Fund (NYSE: EWH) listed in the U.S. The two ETFs hold very similar stocks, except that EWH excludes HSBC in its holdings. But the two considerations below make the AMUNDI HK35 the preferred choice for Hong Kong investors:

  • AMUNDI HK35 has an expense ratio of 0.33%, lower than the 0.48% of EWH.
  • EWH is subject to 30% U.S. dividend withholding tax, while AMUNDI HK35, locally listed in Hong Kong, is not subject to any dividend tax.

Mind the Mainland opportunities, though

Investors seeking to avoid Mainland risks should note that the Mainland factor has served more as an upside rather than a downside to the Hong Kong stock market in the past. One of main reasons why Hong Kong’s stock market emerged as the world’s best-performing stock market over the past 30 years was the presence of many rapid-growing Chinese enterprises like Tencent(SEHK: 700). Also, the Tracker Fundhas so far outperformed AMUNDI HK35 since the inception of the latter in 2016 (36.11% growth v.s. 33.16% growth).

But of course, past performance does not indicate future returns. Passive investors who seek to minimize the Mainland risks while still exposing to the broad Hong Kong equity market may find comfort in investing in AMUNDI HK35.


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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Alex Ng doesn't own any shares mentioned above.