Hong Kong ETFs battered amid ongoing unrest

Aug 13th, 2019 | By | Category: Equities

ETFs providing exposure to Hong Kong equities have been taking a hammering as civil unrest continues to escalate within the special administrative region.

Hong Kong ETFs battered amid ongoing unrest

Civil unrest is continuing to escalate in Hong Kong.

The NYSE Arca-listed iShares MSCI Hong Kong ETF (EWH US), the largest ETF to track the market, has slumped 11.1% in USD terms between 24 July and 12 August 2019.

Similar returns have been recorded in other Hong Kong-equity-linked products.

While demonstrations in Hong Kong, brought about by anger over a now-suspended extradition law permitting Hong Kong citizens to face trial in Mainland China, officially began in June, investors appear to have been taking risk off – perhaps in light of simmering discontent – two months prior.

The iShares ETF has hemorrhaged assets since April, shedding $1.4 billion in net outflows up to 12 August 2019. Its AUM currently stands at just over $1.5bn.

With tensions continuing to mount, it is no surprise that investors are still leaving the fund in droves – according to data from Bloomberg, trading in the ETF reached a five-year high on 13 August 2019 with a recorded volume of 25 million shares traded.

Protesters appear to be becoming increasingly emboldened, storming government buildings and, most recently, the city’s airport. Combined with the effects of the ongoing US-China trade dispute, analysts have warned that Hong Kong may be heading for a recession, while some have even compared the disruptions to a ‘black swan’ event that has the potential to significantly disrupt the global economy.

While Hong Kong’s growing volatility, both on the streets and on the stock exchange, is keeping most investors at bay, there will be some that are eyeing up a value-buying opportunity.

For those willing to take on the risk, the iShares fund is by far the most liquid and comes with an expense ratio of 0.48%. It tracks the MSCI Hong Kong Index, which covers the large- and mid-cap segments of the market and currently has 46 constituents.

Other providers with US-listed Hong Kong ETFs include Franklin Templeton and SSGA’s SPDR ETFs.

The Franklin FTSE Hong Kong ETF (FLHK US) tracks the FTSE Hong Kong Capped Index which, with 91 constituents, provides broader access to the greater Hong Kong equity universe. It is also the cheapest Hong Kong ETF with an expense ratio of just 0.09%. The SPDR Solactive Hong Kong ETF (ZHOK US), meanwhile, is linked to the Solactive GBS Hong Kong Large & Mid Cap USD Index, which currently has 54 constituents, and comes with an expense ratio of 0.15%.

Both the Franklin and SPDR funds are relatively new, however, and neither has accumulated significant assets.

In Europe, the largest Hong Kong ETF is the Lyxor Hong Kong (HSI) UCITS ETF listed on Euronext Paris (HSI FP), Borsa Italiana (HK IM), Xetra (LHKG GY) and SIX Swiss Exchange (LYHSI SW). The fund tracks the Hang Seng Index which measures the performance of largest and most liquid companies listed in Hong Kong.

In line with its US peers, fund performance is strongly negative, down 11.1% (USD terms) over the 24 July and 12 August 2019 period; however, it is yet to see any primary market redemptions – a function of its investor base, which is potentially more institutional and longer-term in outlook, and smaller size and lower liquidity.

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