Heroic Hong Kong ETFs
It is a territory of China, giving it an enviable gateway to the world’s second-largest economy and one of a member of the dwindling AAA sovereign credit rating club. Hong Kong is also home to an equity market that is trading at its highest levels in three years.
The Hang Seng traded slightly lower during Friday’s Asian session, but up 7% in the past three months, Hong Kong’s benchmark index is deserving of a small respite. After all, that surge has helped make Hong Kong ETFs, a pair of which are usually overlooked, high fliers.
Over the past 90 days, the $2.3 billion iShares MSCI Hong Kong ETF (EWH) is up 5%. Sure, there are other single-country ETFs that have been better over that period than EWH, but the largest Hong Kong ETF is now flirting with $22, a price it has not closed above since December 2007. [Hong Kong ETFs Could Surge]
EWH has lagged other international ETFs because the Hang Seng cratered in March amid fears of slowing growth in China. A more sanguine outlook regarding Chinese economic growth, talk of added stimulus measures from Beijing and compelling valuations – both on the mainland and in Hong Kong – have bolstered EWH and its rivals.
“The Hang Seng Index is currently trading 9.8 times forward earnings, a common valuation measurement, making it far cheaper than 16.7 times on the S&P 500 and 17.8 times for Japan’s Nikkei,” according to the Wall Street Journal.
That means Hang Seng stocks are also less expensive the MSCI Emerging Markets Index. Financials and industrials, over 69% of EWH’s combined weight, are among the more discounted sectors.
Investors looking for an alternative index approach to Hong Kong ETFs can consider the First Trust Hong Kong AlphaDEX Fund (FHK). Although FHK is not a cap-weighted fund, it is still heavy on financial services names with a 52.5% weight to that sector.
That is high concentration to just one sector, but FHK is reflective of the discounts available on Hong Kong with a P/E below 10 and a price-to-book ratio of just 0.98, according to First Trust data.
FHK is up 3.6% in the past month and touched a new all-time high on Thursday. A significant chunk of FKH’s financial services exposure goes to property developers, a group that has been controversial in Hong Kong and China. Still, those stocks, several of which are found among FKH’s top-10 holdings, are soaring “as local governments ease home-purchasing restrictions to boost sales, and fears of a wave of defaults among the country’s heavily indebted corporate sector have failed to materialize,” according to the Journal. [Hong Kong Highs for This ETF]
FHK holds 40 stocks and has $3.9 million in assets under management. It charges 0.8% per year compared to 0.47% by EWH.
iShares MSCI Hong Kong ETF
