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1 Way to Instantly Diversify Across Hong Kong-Listed Stocks

If you are new to investing and don’t know where to begin when it comes to buying Hong Kong-listed shares, you can consider a low-cost index fund. Billionaire investor, Warren Buffett, is a huge advocate of buying low-cost index funds. He said the following during a past interview with CNBC:

“Consistently buy an S&P 500 low-cost index fund. I think it’s the thing that makes the most sense practically all of the time. The trick is not to pick the right company. The trick is to essentially buy all the big companies through the S&P 500 and to do it consistently.”

Like Buffett said, investing in a basket of stocks instead of picking individual companies might be a better option for new investors. The basket of stocks, also referred to as an exchange-traded fund (ETF), offers instant diversification for investors.

Hong Kong’s basket of stocks

Hong Kong’s version of an S&P 500 low-cost index fund is the Tracker Fund of Hong Kong (SEHK: 2800), or TraHK for short. The ETF is designed to provide investment results that closely replicate the performance of Hong Kong’s Hang Seng Index (HSI). The HSI is made up of 50 of the biggest and most liquid shares to represent the Hong Kong stock market, with many of these stocks giving investors exposure to China-focused businesses.

In the past three years up till 30 June 2019, excluding dividends, TraHK has produced an annualised return of 11.1%. Over a longer time frame of 10 years, the annualised return is a stable 4.5%.  TraHK aims to pay dividends twice a year and the dividend yield of TraHK is 3.2%, as of 12 July 2019. TraHK has given investors far higher total returns than Hong Kong bank deposit rates.

As of 30 June 2019, financials, at a 49.2% weight, made up most of the index. Next, was properties & construction (11.6%), followed by information technology (10.3%).

As of 12 July 2019, AIA Group Ltd (HKSE:1299) was the company with the largest weighting in the 50-stock index, taking up 10.8% of the HSI. Coming in second was Tencent Holdings Ltd (HKSE:700), with a 10.1% weighting. And HSBC Holdings plc (HKSE:5) took third spot with a weighting of 9.7%. The corresponding weighting in the TraHK is the same.

The following shows the top 10 holdings of the HSI:

Tracker Fund of Hong Kong holdings

Source: Tracker Fund of Hong Kong website

Nuances of the TraHK

When investing in ETFs, we have to pay attention to the expense ratio and tracking error. The expense ratio is the annual fee that ETFs charge their shareholders while the tracking error shows the difference between the performance of an ETF and its underlying index.

TraHK’s expense ratio for 2018 was a mere 0.09%, and the rolling one-year tracking error was almost negligible at around 0.02%.

As the name exchange-traded fund suggests, ETFs are traded on a stock exchange. So, investors can buy and sell TraHK just like any stock on Hong Kong’s stock market. The board lot size for TraHK is 500 shares. Given the ETF’s current share price is HK$29.35, each lot of the ETF will cost investors HK$14,675 (or around US$1,900), excluding trading fees.

The Foolish takeaway

ETFs offer investors the option to start investing without much risk involved. By consistently buying into the TraHK, investors gain exposure to the Hong Kong stock market with instant diversification across 50 shares. Even though the past returns are not a guarantee of future performance, TraHK should do well in the future as long as Hong Kong’s growth is stable.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Sudhan P doesn’t own shares in any companies mentioned.