IndexIQ, the New York-based ETF issuer that specializes in small caps and quantitative methodology ETFs, announced the latest expansion to its product lineup today with the debut of the IQ Hong Kong Small Cap ETF (HKK). This brand new fund will be the first of its kind to target small cap companies that are domiciled in the region, offering investors the chance to play one of the most densely populated and richest regions in the world via small cap securities.
Hong Kong makes for an interesting choice for many investors for several reasons. The region represents a gateway to mainland China for many investors, allowing exposure to the dynamic market while at the same time maintaining developed market levels of transparency, economic freedom, and minimal corruption. In sharp contrast to the mainland, Hong Kong is consistently ranked as the world’s freest economy and is a leading center for finance and transportation in the Asia Pacific region, making it a prime destination for both corporations and the best and brightest in the area. Thanks to its cultural ties to China but its western approach to capitalism, many investors have decided to make Hong Kong a tactical addition to their portfolios in order to profit from the China boom but with lower levels of geopolitical risk [Singapore And Hong Kong: Crushing The Competition].
HKK Under The Microscope
HKK tracks the IQ Hong Kong Small Cap Index, which is a float-adjusted market cap-weighted benchmark that seeks to provide investors with a means of tracking the overall performance of small cap Hong Kong companies. In total, the fund offers exposure to 100 securities that have a weighted average market capitalization of just $1.1 billion. For sectors, the fund offers a different slice of exposure compared to many large cap focused funds in the region, as the biggest sector is consumer discretionary at close to one-fourth of total assets. Other large weightings go to financials (19%), materials (15.7%), and technology (10.9%), while minimal allocations are made towards the energy, utilities, and health care sectors [see ETFs To Play Millionaire-Heavy Countries].
It should also be noted that the fund’s holdings are remarkably spread out; no one security makes up more than 2.5% of the total assets suggesting that a single company or even a group of firms, will not dominate HKK’s risk/return profile. In terms of expenses, it is pretty competitive with other products in the region, charging investors 69 basis points a year for their services [also see China Sector Investing With ETFs].
Investing in Hong Kong
Currently, there are a number of products that offer some level of exposure to Hong Kong in ETF form but none are more popular– or offer as much exposure– than iShares’ MSCI Hong Kong Index Fund (EWH). That particular fund debuted in March of 1996 and is one of the most popular ETFs in the China Equities space; it has close to $2 billion in AUM and trades roughly 5.1 million shares every trading day. Despite the fund’s immense popularity, it may not represent the best way to play the Hong Kong market as EWH has close to 60% of its total assets in real estate and financial services and it only has 10% in the sectors of consumer cyclical, consumer staples, health care, and technology combined. This suggests that HKK could help those who are already invested in EWH round out their exposure to the region or it could serve as more of a ‘pure play’ for those that do not have any exposure to the dynamic region yet but are looking to beef up their holdings in the near future [FXI: Not The Last Word In China Investing].
Disclosure: No position at time of writing, photo is courtesy of Alan Mak.