Hong Kong's Hang Seng Index has been a stout performer as of late. In the past month, the index has gained 4.7 percent, providing a predictable boost to several Hong Kong-specific ETFs along the way. What has not been predictable is the ETFs that have emerged as the true Hong Kong leaders.
There are just three Hong Kong-specific ETFs on the market today and the undisputed king of that trio is the iShares MSCI Hong Kong Index Fund (NYSE: EWH). EWH is by far the oldest and largest Hong ETF. It debuted in March 1996 and is now home to over $3.2 billion in assets under management.
Not surprisingly, EWH has rallied along with the Hang Seng. In fact, over the past month, the ETF has outperformed Hong Kong's benchmark index by about 90 basis points. EWH closed above $20 on Friday, adding to its first string of consecutive closes above that level since late 2007/early 2008.
The good news nvestors have options beyond EWH for tapping into the Hong Kong rally. However, those looking for alternatives to EWH might have to step out of their comfort zones because the other two Hong Kong-specific ETFs are small and thinly traded.
That conundrum could start with the iShares MSCI Hong Kong Small Cap Index Fund (NYSE: EWHS). Two weeks past its first birthday, EWHS has just $1.38 million in assets under management, indicating that investors have not warmed to the idea of Hong Kong small-cap ETF. That is not surprising as a previous entrant in this space was shuttered due to weak assets and thin volume.
Why investors have reluctant to embrace Hong Kong small-caps is up for debate. What is not debatable is that the Hang Seng Composite SmallCap Index (HSSI) is up 6.65 percent year-to-date, according to Bloomberg data. EWHS does not track that index, but the tiny ETF has gained six percent since the start of the year.
The cautionary tale is that hardly anyone is noticing. EWHS traded just 200 shares on Friday and that is well below an already low daily average of 1,175 shares. Investors that are willing to take a look at EWHS need to be aware of a crucial factor, that being the ETF's tendency to trade above its net asset value. While there were not many days in the fourth quarter of 2012 where EWHS was well above its NAV, say three or four percent, there were a few instances of that happening.
Overall, EWHS traded at a premium to NAV on 58 days during the quarter, according to iShares data. That indicates there were plenty of instances during which investors could have unknowingly paid up for EWHS.
Another alternative to EWH is the First Trust Hong Kong AlphaDEX Fund (NYSE: FHK). FHK will celebrate its first birthday on February 14 and since the fund debuted last year, it has consistently outperformed EWH. The First Trust offering has outpaced EWH over the past year, six-, three- and one-month periods.
Some of the differences are not slight, either. For example, FHK is up 16.3 percent in the past 90 days. EWH is up just 7.5 percent over the same time. The two funds share a few things in common. FHK holds 40 stocks while EWH holds 42. No fewer than 15 holdings are the same between the two ETFs and both are heavily weighted to financials. That sector accounts for over 62 percent of EWH's weight and over 55 percent of FHK's weight.
Despite those similarities and FHK's consistent out-performance of EWH, the former has just over $1.8 million in AUM and average daily volume of less than 200 shares and those are the type of statistics that can keep investors at bay.
Along those lines, it should be noted that in the fourth quarter, there 41 days when FHK traded above its NAV and most of those instances were at a maximum premium of 49 basis points to the fund's bid/ask midpoint, according to First Trust data. That compares favorably with EWH which traded at a premium to NAV on 44 days in fourth quarter.
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