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Which ETFs Should You Consider to Invest in Hong Kong?

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Hong Kong exchange-traded funds

If you’re looking to invest in Hong Kong, which is defined as a developed market by MSCI (MSCI), the iShares MSCI Hong Kong ETF (EWH) is a non-leveraged offering that doesn’t focus on real estate. Other non-leveraged ETFs, whose exposure to Hong Kong stocks ranges from 20% to 26%, are the iShares MSCI Pacific ex-Japan ETF (EPP) and the iShares Asia 50 ETF (AIA).

The EWH is your calling among the ETFs listed above if you want exclusive exposure to Hong Kong stocks, and also because among all ETFs investing in Hong Kong, it clocks the highest volumes.

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The iShares MSCI Hong Kong ETF

The iShares MSCI Hong Kong ETF (EWH) is one of the cheapest options for investing in Hong Kong, one of the three major financial hubs in Asia. Its expense ratio is 0.49%. It tracks the MSCI Hong Kong Index.

The ETF has been around since March 1996 and has $3.7 billion in assets under management, making it the largest ETF focused on Hong Kong.

As mentioned earlier, Hong Kong is one of the three major financial centers in Asia, with Tokyo and Singapore being the other two. Thus, financials dominate the portfolio. As of June 10, 2015, financials stocks made up 64% of EWH’s portfolio. This exposure is up from ~52% exposure at the end of 2013. The highest exposure is to AIA Group Limited (AAGIY), which accounts for 18.1% of the overall portfolio.

Sector-wise, a distant second is industrials, which makes up 12% of EWH’s portfolio. Exposure to this sector has fallen every year since 2009, except in 2013.

It is the consumer discretionary sector that has shown a lot of variation in terms of exposure. Exposure to this sector stood at 10% at the end of 2009, jumped to 18.1% in 2013, and is now down to 9.5% as of June 10, 2015.

Performance

The EWH has returned 12.8% year-to-date, with 60% returns in the past three years and 81.8% returns in the past five years.

ADRs (American Depository Receipts) of companies like China Mobile Games and Entertainment (CMGE), Melco Crown Entertainment (MPEL), and Semiconductor Manufacturing International (SMI) are traded on US exchanges.

You can get a more toned-down exposure to Hong Kong by investing in the iShares MSCI All Country Asia ex-Japan ETF (AAXJ), which has only 12.3% of its assets invested in Hong Kong stocks, which is smaller than other ETFs, but not insignificant.

In the next article, we’ll look at ETFs for Singapore.

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