I've mentioned in my articles discussing investing in foreign jurisdictions that I'm on a quest to diversify the geography of my portfolio. I've discussed my thoughts on Australia (here) and New Zealand (here). One of my personal criterion for something if it's going to be in my portfolio is that it MUST have a dividend yield - without a yield, I won't give the time of day to any equity.
I found another ETF investing in a foreign jurisdiction that had a decent dividend yield - the iShares MSCI Hong Kong Index (EWH). My curiosity led me to immediately start researching this ETF and jurisdiction, and I'd like to share my findings and opinions with you.
Hong Kong's Economic Pillars
When looking into whether I want to invest in a jurisdiction, I start by looking at the jurisdiction's economic pillars - as the economy is tied to the performance of individual equities and the sectors in the market.
Hong Kong is current world's freest economy - holding an overall score of 89.3 from the 2013 Index of Economic Freedom. This score is 0.6 point lower than last year, due to increased government spending relative to its GDP and rising inflation. Hong Kong is a capitalistic service economy characterized by low taxation and free trade with service sectors accounting for more than 90 percent of the total GDP.
The currency, the Hong Kong Dollar [HKD], is the eighth-most traded currency in the world. Hong Kong is the second-largest recipient of foreign direct investment in Asia, behind mainland China. And Hong Kong is the third-largest source of foreign direct investment in Asia, after Japan and mainland China. Currently, the government is promoting the Special Administration Region [SAR] as the site for Chinese renminbi (CNY) internationalization. With this initiative, residents can establish renminbi-denominated savings accounts and renminbi-denominated corporate and Chinese government bonds have been issued in Hong Kong. The government is pursuing efforts to introduce additional use of renminbi in Hong Kong financial markets and is looking to expand the renminbi quota (Source: CIA World Fact Book).
GDP and Main Expenditure Components (as of Q1 2013)
Private consumption on expenditure
Government consumption expenditure
Gross domestic fixed capital formation
Export of goods
Import of goods
Export of services
Import of services
These components are results of activities (increases or decreases) in the first quarter of 2013. Points of interest specifically are that the total exports of goods growth was mainly because of a surge in exports of non-monetary gold, and that the decrease in gross domestic fixed capital formation was attributed to volatile machinery and equipment investments.
GDP by Economic Activity (as of Q4 2012)
Services - Import/export, wholesale, and retail
Services - Accomodation and food services
Services - Transportation, storage, postal, and courier services
Services - Information and communications
Services - Financing and insurance
Services - Real estate, professional and business services
Services - Public administration, social, and personal services
While Hong Kong is showing the same amount of vulnerability to the word's economic woes as the rest of the developed and emerging markets due to its ties with the Asian markets, Hong Kong is still a major player in the exporting and importing of goods and commodities and the construction trades. These two industries in general are never bad pillars to have being the major contributors of GDP - as trading allows the diversification of risk and better margins and construction allows for continual infrastructure improvements and developments - both of which can thrive in its capitalistic economy.
The iShares MSCI Hong Kong ETF
The EWH is the way I'd like to play Hong Kong. The EWH has $2.21B in assets under management and has an expense ratio of 50 basis points. The EWH currently invests in 43 equities with 0.03 percent in cash. And EWH currently has a 12-month yield of 3.04%.
The sector breakdown is as follows: financials (60.34%); consumer discretionary (12.77%); utilities (12.71%); industrials (10.86%); information technology (1.74%); telecommunications (1.14%); S-T securities (0.03%); and other (0.41%).
Top 10 Holdings
The top 10 holdings of this ETF accounts for 57.91% of net assets. Information was founds at iShares.
- AIA Group Ltd. (1299.HK/AAGIY) - 15.05%
Hutchison Whampoa Ltd. (0031.HK/HUWHY) - 6.99%
Sun Hung Kai Properties (0016.HK/SUHJF) - 6.18%
Cheung Kong Holdings Ltd. (0001.HK/CHEUY) - 5.86%
Hong Kong Exchanges & Clearing Ltd. (0388.HK/HKXCY) - 5.06%
Hong Kong & China Gas (OTC:HOKCF) - 4.20%
CLP Holdings Ltd. (0002.HK/CLPHY) - 4.09%
Wharf Holdings Ltd. (OTCPK:WARFF) - 3.60%
Power Assets Holdings Ltd. (0006.HK/HGKGY) - 3.46%
Sands China Ltd. (1928.HK/SCHYY) - 3.44%
One year: 16.82%
Three years: 10.22%
Five years: 5.05%
10 years: 12.44%
Since inception (3/12/1996): 5.09%
EWHS Fundamentals and Risk
52-weeks range of 24.75 to 30.28
Price-to-Earnings Ratio of 15.03
Price-to-Book Ratio of 2.46
Beta vs S&P 500 of 0.77
Standard Deviation (3 years) of 20.45%
In my search for global diversity in my portfolio, I'd like to include at least one Asian jurisdiction. I think Asia in general is drawing a lot of attention - as an example, Japan has Abenomics, China has a slowdown, and the Asian emerging markets are also victim of a massive sell-off. However, I still believe Asia can serve a portfolio well. Specifically relating to Hong Kong and the EWHS, I like the ETF and I like the economic pillars - exports, imports and construction.
As much as I wish the story behind Hong Kong and the EWHS is that simple and I would say that this is a hands-down 'buy', I continue to emphasize that if you're going to buy into the EWHS, I recommend doing research on the economy as a whole and look at what's going on in the Asian markets, as the volatility of this ETF will be tied heavily, if not entirely, to the performance of Hong Kong's economy.
Overall, I like Hong Kong and think that if you're willing to go long with this ETF, you have a chance for growth in your portfolio.