Hang Seng Tech ETF – Is It Worth Investing?
Should you invest in the stocks of China’s biggest technology companies? Theanswer is a definite yes to me. But how you invest in China is the trickypart, especially the technology sector.Many clients and readers asked me about Lion Global’s new ETF, Lion-OCBCSecurities Hang Seng TECH ETF. Is this a good investment opportunity or it isjust another hype?You may know that I have been long advocating to invest in China. China’sfinancial market is often misunderstood due to the lack of understanding ofher history and culture by the outside world. China’s stock market is built ona different system and the underlying economy operates differently comparingto the western world. This is not to say China’s stock market is better orworse, just different. So if you are interested in investing in China’s techcompanies, read on…The interesting thing about the Hang Seng TECH Index is that there are alreadyseveral ETFs listed in Hong Kong tracking the same index but never attractedmuch interest from the local investors. They are * iShares Hang Seng TECH ETF – Ticker 3067 (HKD) & 9067 (USD) * ChinaAMC Hang Seng TECH Index ETF – Ticker 3088 (HKD) & 9088 (USD) * Hang Seng TECH Index ETF (by Hang Seng Investment) – Ticker 3032 * CSOP Hang Seng TECH Index ETF – Ticker 3033I won’t go through the technical details which you can easily find themonline. What I am going to explain in this article are three common myths thatI observed from retail investors.
1: Hang Seng Tech ETF is China’s Nasdaq
As you probably know, an ETF only tracks the performance of an underlyingindex. In this case, the Lion-OCBC Securities Hang Seng TECH ETF tracks HangSeng TECH Index. The index was only launched recently on 27 July 2020 and ittracks the 30 largest TECH-themed companies listed in Hong Kong as listedbelow. Many are familiar names, you may not be familiar with Sunny Optical orSMIC, but you definitely heard about Alibaba, Tencent, and Xiaomi.One unique “selling point” about the Hang Seng Tech index is that it has anIPO Fast Entry rule. It means Qualified IPOs can be included in the indexshortly after listing. To a certain extent, this rule was tailor-madespecifically for ANT IPO, whose recent mega IPO debut was unfortunatelysuspended by China’s regulators. I don’t think there will be any other companythat meets the “qualification” in the near term.Some blogs and stockbrokers refer to the Hang Seng Tech index as China’sNasdaq index. This is not accurate. You need to understand Hang Seng Techindex is only tracking the companies listed in Hong Kong, and there arethousands of other tech companies listed in Shang Hai and Shenzhen exchanges.The real Nasdaq-styled market in China is ChiNext in Shenzhen and the STARmarket in Shanghai. * ChiNext started in 2009 and it is geared more towards growth-oriented innovative and start-up enterprises. Now they have 880 stocks with 10 trillion RMB market capitalization. * STAR Market is relatively new and touts the priority to “hard technology” companies. These include next-generation infotech such as internet-of-things, artificial intelligence, big data, and new energy. They now have 133 listings worth a total of Rmb2.8 trillion.Although Hang Seng Tech Index does include some of the best China technologycompanies, it is not a good representative of China’s technology sector whichis far broader.Every index has its own methodology. That is why there is no true passiveinvesting.Related reading: why ETF investing is not passive investing.If you are into the technical details, the Hang Seng TECH Index consists ofGreater China-incorporated stocks that specifically have high businessexposure to the internet, fintech, cloud computing, e-commerce, and digitaltechnology themes.The 30 largest stocks must meet these criteria and are ranked by marketcapitalization. Constituents are weighted by free-float market capitalization,subject to a cap of 8% on any individual stock. The major positions of theindex include well-known Chinese names such as Alibaba, Tencent, Xiaomi,Meituan Dianping, Sunny Optical, JD.com. Other familiar holdings includeLenovo, NetEase, and Ping An Healthcare & Technology.
2: Subscribing the IPO to “lock-in” the price
There are countless times that I hear people saying that they want tosubscribe to a new ETF or unit trust to “lock-in” the price. Inexperiencedinvestors tend to regard IPO as a sure way of making money. Moreover, ETF’sIPO is nothing like a stock’s IPO. I have highlighted this when Nikko launchedits Investment Grade Corporate Bond ETF.As ETF’s price is “derived” from the underlying stocks. There is no “initial”price for an ETF per se, it is really just a reference starting point that isused to calculate the future fund price based on the weighted average movementof the underlying 30 stocks.So if you think by subscribing to an ETF IPO, you can make quick bucks likethe Hong Kong IPO fever, you can’t be more wrong.
3: Buying Hang Seng TECH for long term holding
I can’t say this won’t work out well, but throughout my conversation with myclients and readers, I find that one of the biggest mistakes of retailinvestors is that they are focusing too much on the product than the price.Related Reading: Why long term investment is a bad strategy.If you seek investment advice online, you will typically see something likethese: * “Buy Tesla’s shares because it has great potential.” * “Buy Apple shares because it sells great products.” * “Buy ABC company because the pandemic boosts its earnings.”Well, these may be legitimate claims, but it does not factor in your uniquepersonal circumstance and risk tolerance level. It also does not consider theopportunity costs should you buy at a higher price.The truth is that you can buy the stock of a great company but still losingmoney. Of course, you can also buy a loss-making company yet make a fortune.My point is when you assess an investment opportunity such as Hang Heng TechETF, not only do you need to study the merit of the product, but you shouldalso pay attention to the market price.From a valuation perspective, China’s tech companies are severely undervalued.For example, Amazon is trading at 93 times P/E ratio based on 12 monthstrailing PE and 66 times forward P/E (based on Dec 2020 estimate). Oncontrary, Alibaba is trading at 47 times trailing P/E and 26 times ofestimated P/E. So why? Are all the institutional investors dumb or are you toosmart?> “My philosophy is that all stocks are bad. There are no good stocks unless> they go up in price.” – William O’NeilLet me go back to the early statement I made, it is not to say that China’stech companies are better or worse than their US counterparts, but they are“undervalued” for a reason because they are under different market conditions.I will discuss this more in the future, subscribe at the end of this articlefor future updates.Related Reading: Should you invest in Chinese tech stocks after China’s techcrackdown?
TL;DR: Hang Seng TECH Index And Related ETFs
Here’s a summary of the article: * The Hang Seng TECH Index comprises the 30 largest technology companies listed on the Hong Kong stock exchange. * Some of the index components include companies such as Lenovo Group, NetEase, and Xiaomi. * One cannot invest directly in an index. However, there are four ETFs tracking the Hang Seng TECH Index that investors can buy into.* * *
What’s the Hang Seng TECH Index About?
The Hang Seng TECH Index was launched on 27 July 2020.And it tracks 30 of the biggest technology growth companies listed on theStock Exchange of Hong Kong.Those companies must be part of the industrials, consumer discretionary,healthcare, financials, or information technology sector.They must also have high business exposure to technology themes such as theinternet (including mobile), fintech, cloud computing, e-commerce, or digital.Other than the requirement above to be eligible, it must also meet at leastone of the following criteria: * It must be a technology-enabled business (e.g. via internet/mobile platform); or * Have a research and development (R&D) expense to revenue ratio of more than or equal to 5%; or * Possess year-on-year revenue more than or equal to 10%.Only companies incorporated in Greater China (mainland China, Hong Kong, Macauor Taiwan) and listed on the main board of the Hong Kong stock exchange willbe eligible for selection.The index is weighted by free-float market capitalisation, which refers to acompany’s total number of outstanding shares that can be publicly tradedmultiplied by its share price. The companies with the greatest marketcapitalisations will have the highest weights in the index.Index components will be reviewed and rebalanced every quarter (data cut-offoccurs end of March, June, September, and December).Based on back-tested performance over the past five years (as of 31 August2020), the Hang Seng TECH Index would have posted a gain of 155% versus theHang Seng Composite Index’s (similar to Singapore’s Straits Times Index)increase of just 16%.
What Are the Companies Part of the Hang Seng TECH Index?
Some of the companies from the index include well-known names like Alibaba,Tencent, Meituan Dianping, JD.com, and Xiaomi.Here’s a full list of the 30 components of the Hang Seng TECH Index and theirrespective weights:Name| Ticker| Approximate Weight (%)| Sector —|—|—|— Xiaomi Corporation| 1810| 11.16| Information Technology Meituan Dianping| 3690| 10.11| Information Technology Alibaba Group| 9988| 9.17| Consumer Discretionary Tencent Holdings | 700| 7.88| Communication Sunny Optical Technology | 2382| 6.44| Information Technology JD.com| 9618| 5.67| Consumer Discretionary Semiconductor Manufacturing International Corporation (SMIC)| 981| 4.65|Information Technology Kingdee International Software Group| 268| 4.46| Information Technology Alibaba Health Information Technology| 241| 4.38| Health Care Lenovo Group Limited| 992| 3.62| Information Technology Ping An Healthcare and Technology Co Ltd| 1833| 3.51| Health Care Kingsoft Corporation| 3888| 3.31| Information Technology AAC Technologies| 2018| 3.15| Information Technology BYD Electronic (International) Company| 285| 2.51| Information Technology ASM Pacific Technology Ltd| 522| 2.48| Information Technology NetEase Inc| 9999| 2.47| Communication China Literature Ltd| 772| 2.13| Communication ZhongAn Online P&C Insurance Co Ltd| 6060| 1.86| Financials Weimob Inc| 2013| 1.83| Information Technology ZTE Corporation| 763| 1.65| Information Technology Tongcheng-Elong| 780| 1.57| Consumer Discretionary Koolearn Technology Holding Ltd| 1797| 1.35| Consumer Discretionary Hua Hong Semiconductor| 1347| 1.23| Information Technology Maoyan Entertainment| 1896| 0.76| Consumer Discretionary XD Inc| 2400| 0.62| Communication HengTen Networks Group Limited| 136| 0.54| Consumer Discretionary FIT Hon Teng Ltd| 6088| 0.51| Information Technology Q Technology Group Co Ltd| 1478| 0.38| Consumer Discretionary NetDragon Websoft Holdings Limited| 777| 0.33| Communication Yixin Group Ltd| 2858| 0.25| Financials Source: Hang Seng Indexes (as of 31 August 2020)
Is Hang Seng TECH Index ETF for You?
If you would like to diversify your portfolio into fast-growing Chinese techcompanies, the Hang Seng TECH Index ETF could be it.However, do note that since the index components are growth companies, theindex doesn’t trade at a low valuation.As of 17 July 2020, the Hang Seng TECH Index had a price-to-earnings (P/E)ratio of 45x while the Hang Seng Composite Index’s P/E ratio stood at just12x.Source: Hang Seng IndexesInvestors should be comfortable paying a higher-than-normal valuation toinvest in the fast-growing Chinese tech companies.If you choose to go for the iShares Hang Seng TECH ETF due to its low expenseratio, you should also be satisfied with the ETF possibly using financialderivatives such as futures contracts and options to achieve its investmentobjective.(P.S. Don’t have a brokerage account to invest in the Hong Kong-listed ETFs?Do check out the best brokers backed by real user reviews if you wish to openan account!)
1. Tech stocks investors
NASDAQ 100 is home to the four iconic tech companies that reached the trillionmarket cap in the US. They are Apple (AAPL), Amazon (AMZN), Microsoft (MSFT)and Alphabet (GOOG, GOOGL).Another valuable tech companies such as Adobe (ADBE), Cisco (CSCO), Intel(INTC), Qualcomm (QCOM), NVIDIA (NVDA), Advanced Micro Devices (AMD), Micron(MU) and Baidu (BIDU) also contribute for the growth of Nasdaq 100.
Other Top Indexes in the World:
Disclaimer: This content is for information purposes only and should never beconsidered as investment advice. Past performance is not a guarantee of futureresults. All investments have risks. Risk only capital you’re not afraid tolose. The author has no business relationship to the companies whose stockshave been mentioned.China ETF providers bet on Hong Kong-listed tech stocksThe products will give Chinese investors better access to Hong Kong-listedmainland stocks such as Alibaba and Tencent. Other names in the index,comprising the 30 largest tech stocks listed on the Hong Kong stock exchange,include JD.com, Meituan Dianping, NetEase and Semiconductor ManufacturingInternational and Xiaomi.The China Securities Regulatory Commission (CSRC) announced its approval forthe ETFs on Friday, which was reported in state media.The six Chinese mutual fund managers include China Asset Management, DachengFund Management and E Fund Management.The Hang Seng TECH Index was introduced in July 2020, and is divided into sixsegments: healthcare, consumer discretionary, industrials, finance,information technology and others, with information technology accounting foralmost 70% of market cap.“In view of the rapid blossoming of new businesses in the technology sectorand the increasing number of technology companies that are listed in HongKong, we developed the Hang Seng Tech Index to meet the fast-growing interestin this investment theme among investors,” Anita Mo, Hang Seng IndexesCompany’s deputy CEO, said at the time.CSOP Asset Management, based in Hong Kong, was the first out of the blocks,launching an ETF tracking the index in August 2020.Other managers quickly followed, with ETF products linked to the TECH indexlaunched by China Asset Management and Hang Seng Investment Management a fewdays later, and then Blackrock receiving approval from the Securities andFutures Commission (SFC) in September to launch the iShares Hang Seng TechETF.
What is Hang Seng Tech Index?
Hang Seng Tech Index tracks the 30 largest tech companies listed on the HongKong stock exchange. This stock market index comprises of companies spanningin different technology industries including internet, fintech, cloud,eCommerce, and digital activities.
1. Tech Stocks Investors
If you want to diversify your tech portfolio with Chinese tech stocks likeAlibaba, Tencent, Xiaomi, JD, Meituan, and the like, why not? These companiesare enormous and are favorites by many traders, too—no wonder why they arelisted on numerous stock exchanges worldwide.According to the Hang Seng Index press release, “from back-testing data, HangSeng Tech Index would have achieved significant returns of 36.2% for the fullyear of 2019 and 35.3% for the first half of 2020.”
4. Long Term investors
Of course, there will always be investment prospects for long term investorsof Hang Seng tech stocks. Besides investing in Hang Seng tech index, you canalso select your top equities. If you want to go long, with buy and holdstrategy, you can grow some profit choosing the best stocks suited for youranalysis.We hope that some ETFs that track the performance of the Hang Seng tech indexwill be introduced soon.