How to trade on the Hong Kong Stock Exchange through ETF

“If you want to see capitalism in action, go to Hong Kong.” ~ Milton Friedman

Hong Kong has come a long way. As a British colony, it was described as a “barren rock” by Lord Palmerston, the former British Foreign Secretary and Prime Minister. Today, it is reported that the market value of the Hong Kong Stock Exchange ranks fifth in the world. The following are some direct and indirect ways for investors to enter the Hong Kong market.

Key points

  • Investing in an exchange-traded fund (ETF) is a simple way for investors to gain exposure to Hong Kong securities without facing currency risks.
  • US investors can purchase a limited number of Hong Kong stocks listed as American Depositary Receipts (ADR) on the New York Stock Exchange, Nasdaq, and over-the-counter markets.
  • Investors can also open accounts with brokerage companies that provide international trading platforms to trade Hong Kong stocks.

Trading on the Hong Kong Stock Exchange

Since the British handover in 1997, Hong Kong and China have been operating in accordance with the principle of one country, two systems. Hong Kong is known as the Special Administrative Region (SAR) and can freely promote capitalism and manage its own taxation, currency, trade, foreign exchange and currency: the Hong Kong dollar.

In November 2014, the Shanghai-Hong Kong Stock Connect was opened to establish a cross-border stock market and investment channels.This arrangement allows investors in Mainland China and Hong Kong to trade designated companies listed on the other’s stock exchange through local securities companies. The following are several ways that investors can directly or indirectly trade on companies listed on the Hong Kong Stock Exchange.

Exchange Traded Fund

The easiest way for US investors to gain exposure to Hong Kong securities is through an exchange-traded fund (ETF). These provide diversification and ease of trading without currency risk. Popular exchange-traded funds in this category include iShares MSCI Hong Kong ETF and First Trust Hong Kong AlphaDEX Fund.

iShares MSCI Hong Kong ETF (NYSE: EWH) mainly invests in large and medium-sized companies in the financial and real estate sectors. This 24-year-old fund holds 47 stocks and, as of July 2020, manages net assets worth US$1.24 billion.

First Trust Hong Kong AlphaDEX Fund (NYSE: FHK) is an eight-year-old fund designed to track the Hong Kong stock market by matching with a stock index called the Nasdaq AlphaDEX Hong Kong Index. The fund uses an indexation method and manages $3.1 million in assets.

American Depositary Receipt

US investors can choose Hong Kong stocks listed on local stock exchanges such as the New York Stock Exchange (NYSE) or Nasdaq or over-the-counter (OTC) exchanges as American Depositary Receipts (ADR). ADR is an easy way to own foreign stocks because they are traded on US exchanges and can be purchased through a brokerage account like ordinary stocks. The disadvantage here is that the options are limited-only a few foreign stocks are registered as ADRs.

Some popular Hong Kong ADRs include AIA Group Limited (US OTC code: AAGIY), Sun Hung Kai Properties Limited (US OTC market code: SUHJY) and Hong Kong Television Network Limited (US OTC market code: HKTVY).

Direct investment through a broker in your country/region

ETF is a way to indirectly hold stocks on the Hong Kong Stock Exchange. ADR is a way of direct ownership, but the options are very limited. Investors who are keen to participate directly and extensively in the Hong Kong Stock Exchange should open a brokerage account with a brokerage company in their country, which provides an international trading platform.

Foreign companies must be registered with the U.S. Securities and Exchange Commission (SEC) to be offered as ADRs.

Brokerage companies that provide international access usually provide many international exchanges, including Hong Kong. Make sure to thoroughly research the broker before trading with it. Check the account type (full or non-full power), commission structure, and the regions and countries covered. In the United States, seek SEC registration and membership of the Securities Investor Protection Corporation (SIPC) and the Financial Industry Regulatory Authority (FINRA).

Some well-known foreign stock exchange brokerage companies in the United States are Interactive Brokers (IBKR), Euro Pacific Capital Inc., E*TRADE (ETFC), Fidelity Investments, and Charles Schwab (SCHW).

Direct investment through Hong Kong brokers

Investors from all over the world can make online investments through local stock brokers based in Hong Kong. However, residents of certain countries/regions are restricted, and Hong Kong brokers must clear certain barriers to provide services. For example, in the United States, financial institutions that are not registered with the SEC cannot solicit U.S. citizens as customers.

In addition, the Foreign Account Tax Compliance Act (FATCA) has set additional restrictions, so some Hong Kong brokers avoid American clients.However, residents of other countries may not face the same problems.

Bottom line

With a large amount of Chinese investment flowing into the market, the Hong Kong Stock Exchange has been soaring. Investors keen on long-term investments must remember that recent price increases and subsequent volatility are not based on fundamentals.

Investors should pay attention to making decisions based on company earnings and economic factors, not just price fluctuations. Overall, investors should choose their preferred route to the Hong Kong Stock Exchange after understanding the costs, risks, tax considerations and regulatory compliance involved.

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