The valuations of the companies that adopted the Communist Party committee reflect these fears, trading nearly 25 percent lower than the overall market.
Investment Options
There are two Hong Kong-focused ETFs. The iShares MSCI Hong Kong ETF (EWH), which has $1.9 billion in assets under management, has been tracking the MSCI Hong Kong Index since 1996 and provides exposure to stocks that trade primarily on the Hong Kong Stock Exchange. It currently holds 46 companies, none of which are on the list of 32 companies impacted by the implementation of the Communist Party committees. EWH’s expense ratio of 48 basis points is well worth the cost for investors who received returns of 28.9 percent through August 31.
The First Trust Hong Kong AlphaDEX Fund (FHK) is a smaller ETF with only $8.1 million assets. The fund launched in 2012 and tracks the NASDAQ AlphaDEX Hong Kong Index. This so-called enhanced index uses a quantitative method to score stocks based on growth factors. Like EWH, none of FHK’s 40 current holdings made the list of 32. Charging 80 basis points, significantly higher than its peer, FHK likewise returned 28.9 percent year-to-date.
And there are other options to invest in China to mitigate being impacted by the Communist Party committees. The WisdomTree China ex-State-Owned Enterprises Fund (CXSE), incepted in 2012, has $29.9 million assets. Like the Hong Kong-focused ETFs, CXSE does not hold any of the 32 Communist Party committee companies.
All of the approximately 130 companies held in the portfolio are less than 20 percent owned by the Chinese government, making this fund’s components less likely to experience the Party’s influence. CXSE is not only a top performer this year, returning 57.4 percent, but is also one of the cheapest in the China ETF category with an expense ratio of 32 basis points.
Similarly, none of the approximately 60 holdings in the PowerShares Golden Dragon China Portfolio (PGJ) have added the Communist Party advisory committee. Since 2004, PGJ has been tracking the NASDAQ Golden Dragon China Index, which invests in U.S. exchange-listed companies that are headquartered or incorporated in the People’s Republic of China and derive a majority of their revenues from the region.
Although its expense ratio of 70 basis points is just above the category average, the safety derived from the rigor of the U.S. exchanges may be worth the additional expense. Its year-to-date performance is near the top of the category at 50.3 percent.
The Bottom Line
The fear of intervention in the market by the Chinese government is worrisome. The Hong Kong market has always been immune to this type of interference, attracting international investors without concern. Hong Kong-based companies should be untouched by the Communist Party’s effort to give its two cents to the board directors of Chinese companies. But this situation potentially has far reaching impacts not only on China-focused ETFs, but also emerging-markets ETFs, many of which have high exposure to China.