Disclaimer

The articles in the blog are intended for informational purposes only, with the aim of encouraging thoughtful discussions. The articles should not be relied upon as financial advice. Please read the important disclaimer at the bottom of the page before proceeding.

Venturing Beyond The Singapore Market: Tracker Fund HK (2800.HK)



I have been monitoring the Hang Seng Index since the protests in Hong Kong started in the middle of last year, with the aim of diversifying my portfolio beyond the Singapore market. I believe that it would be more appropriate for my first foreign investment to be via an ETF (safer, perhaps?), and the Tracker Fund of Hong Kong (2800.HK), listed on the Hong Kong Stock Exchange, seems to be an ideal choice. For a brief overview, TraHK seeks to track the performance of the Hang Seng Index, which includes the largest and most liquid constituent companies listed on the Hong Kong Stock Exchange. The fund's top 10 holdings are as follows:



My rationale for investing in this ETF is rather straightforward:

1) Gives my portfolio geographical exposure beyond Singapore equities. The HSI is more of a proxy for China's economy than Hong Kong's, due to the proportion of Chinese companies making up more than 50% of the index.

2) It has a low total expense ratio of 0.09% annually. For a comparison, the STI ETF that I am currently invested in has a TER of 0.30%, while the REIT ETFs have a TER of around 0.50%. Low total expense ratios for ETFs are generally more common in the US and Europe, where the ETF markets are more developed, meaning managers can charge lower fees due to scale.

3) The current dividend yield of the fund is 3.4% (as of 7 Feb 2020), which I believe is decent given the current low interest rate environment. For a comparison, the STI ETF's dividend yield currently stands at 3.7%.

Historical Price to Earnings Ratio of the Index and Sectors

The Hang Seng Index provides data on the historical P/E ratios of the index and certain sectors within the index. More details can be found here:  https://www.hsi.com.hk/eng/indexes/all-indexes/hsi





Historical Dividend Yield



Risks

1) The HSI is relatively biased towards financials (c.48% of index), with AIA and HSBC having combined weighting of nearly 20% of the index. There are also a number of Mainland banks on the index, such as China Construction Bank, ICBC and BOC. Any slowdown in the Chinese economy due to the spread of the Coronavirus may adversely affect these Chinese banks.

2) Foreign exchange risk from SGDHKD. My personal opinion is that the risk of FX translation losses eating into returns are low, as the Hong Kong Dollar is pegged to the US Dollar within a band. Unless some catastrophic event results in the HKMA being unable to defend the peg, I believe that the risks of a large depreciation is very unlikely.

Future Possibilities


An interesting development I would like to see would be the inclusion of Alibaba shares in the HSI. I believe that this would be a positive move for the index, as it would reduce the concentration in financials. After Alibaba's successful secondary listing in Hong Kong despite the political unrest, I think that it would be a strong addition to the index.

However, my current understanding is that some issues have to be ironed out before Alibaba can be added to the index, as there are existing rules regarding Alibaba's voting structure and secondary listings that may complicate the process.



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Note: As of time of writing, I do not hold a position in 2800.HK

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