Should You Invest in the Hang Seng Index?
A Guide to Hong Kong's ETFs, ADRs and More
Hong Kong is the world's freest economy and one of the world's leading financial centers, with low taxation, near-free port trade, and international financial markets. These dynamics have made the country's stock market—the Hong Kong Stock Exchange—the third largest in Asia behind Japan's Tokyo Stock Exchange and China's Shanghai Stock Exchange, and the sixth largest in the world.
International investors tracking this market often watch the Hang Seng Index, which tracks the largest companies traded on the Hong Kong Stock Exchange, accounting for about 60% of the exchange's total market capitalization. Since its inception in July of 1964, the index has moved from 100 points to more than 20,000 points in December of 2006, which represents a 19,900 percent gain.
The Hang Seng Index
The Hang Seng Index is a stock market index consisting of 50 of the largest and most liquid companies listed on the Hong Kong Stock Exchange that accounts for more than half of its total market capitalization. Like the S&P 500 in the United States, the index is designed to mimic the overall performance of the stock market at any given time, with a base value of 100 on July 31, 1964.
The Hang Seng Index provides international investors with a quick glance into the health of Hong Kong's stock market, which can be difficult to see when looking at individual equities. The global nature of Hong Kong's economy also means that the Hang Seng serves as a proxy for the wider Asian market—especially China's stock market that is often mis-priced due to capital restrictions.
Like many indexes, the Hang Seng also underlies many exchange-traded funds (ETFs) that provide easy exposure to Hong Kong's economy in a single security. These ETFs offer a simpler alternative to American Depository Receipts (ADRs) that provide additional exposure to individual Hong Kong stocks, which must be integrated into a wider portfolio to ensure diversification.
Other Hong Kong Indices to Follow
There are many different versions of the Hang Seng Index available to international investors, ranging from industrial divisions to corporate sustainability and other niches. The core industrial divisions include finance, utilities, properties, and commerce/industry, while other divisions include access to both mainland and China-affiliated companies in the space.
The major Hang Seng Indexes include:
- Hang Seng China Enterprises Index
- Hang Seng China-Affiliated Corporations Index
- Hang Seng China H-Financials Index
- Hang Seng Corporate Sustainability Index
- Hang Seng Mainland 100
- Hang Seng HK 35
- Hang Seng REIT Index
- HIS Volatility Index
- Hang Seng China 50 Index
- Hang Seng China AH Premium Index
- Hang Seng China A Industry Top Index
Investing in the Hang Seng Index
The easiest way to invest in the Hang Seng Index is using ETFs, although there are no funds that are traded in the United States. The best alternative is the iShares MSCI Hong Kong Index Fund ETF (EWH), which tracks the MSCI Hong Kong Index—a capitalization-weighted index that aims to capture 85% of the Hong Kong's total market capitalization.
With about $2 billion in total net assets under management, the ETF has a modest expense ratio of 0.48% with 50 holdings in its portfolio. International investors should keep in mind, however, that the index is 33% weighted towards financials, 28% weighted towards real estate, and 11% weighted in consumer cyclicals, creating some concentration risks.
Investors looking for another option may also consider ADRs, which represent individual companies traded on the Hong Kong Stock Exchange. Examples of these companies include AIA Group Ltd. (AAGIY), Hutchison Whampoa Ltd. (HUWHY), and Sun Hung Kai Properties Ltd. (SUHJY).
International investors should keep in mind that the Hang Seng and related Hong Kong ETFs and ADRs involve a higher level of risk than domestic investments. In addition to being an emerging market, companies operating in China may have greater political risk given the government's track record of intervention and the rise of state-run businesses.