3 Hong Kong ETFs For Market Demotion Chatter

Since the handover of Hong Kong to China in 1997, the former acted as a special administrative region (SAR), functioning mostly autonomously of Beijing while climbing the ranks of the world's marquee financial centers.

More recently, tensions between the SAR and mainland China are escalating, prompting some experts to speculate on the fate of Hong Kong's market classification. Currently, the region is classified as a developed market, but there are concerns if Beijing applies a heavy regulatory hand, Hong Kong could be demoted to emerging markets status.

“Hong Kong is going to be interesting. Whilst the regulators in Hong Kong remain independent, and the rules and regulations of Hong Kong remain independent of mainland China, I think they should continue to keep Hong Kong the way it is,” said former FTSE Russell CEO Mark Makepeace in an interview with Sky News.

Along with MSCI and Standard & Poor's, FTSE Russell is one of the largest providers of indexes for exchange-traded funds and its market classifications are widely followed by institutional investors. It's the index provider for the Vanguard FTSE Emerging Markets ETF VWO, among other well-known ETFs.

“If that changes, and the regulation is driven from mainland China and the capital controls are decided by Beijing, then Hong Kong should be treated in the same way as China - and that would lead to a demotion of Hong Kong to become an emerging market,” said Makepeace.

Here are some ETFs that could be rattled by the Hong Kong rumors.

Franklin FTSE Hong Kong ETF (FHLK)

As its name implies, the Franklin FTSE Hong Kong ETF FHLK tracks a FTSE Russell benchmark – the FTSE Hong Kong Capped Index to be precise.

FHLK isn't the oldest Hong Kong ETF, but it's the cheapest with an annual fee of just 0.09%, or $9 on a $10,000 investment.

While it's not immediately clear if FTSE is planning to demote Hong Kong equities to emerging markets territory, if that does happen, FHLK would be vulnerable because developed markets fund managers would be forced to sell those names.

iShares MSCI Hong Kong ETF (EWH)

The $1.22 billion iShares MSCI Hong Kong ETF EWH is the oldest of the U.S.-listed Hong Kong ETFs, having debuted in March 1996. EWH tracks the MSCI Hong Kong 25/50 Index, which is relevant because FTSE and MSCI don't always make the same calls on market classifications.

Said another way, FTSE could demote the SAR while MSCI keeps it in developed market territory. That said, EWH wouldn't be immune to selling pressure if Hong Kong is relegated to emerging markets status.

SPDR Solactive Hong Kong ETF (ZHOK)

The SPDR Solactive Hong Kong ETF ZHOK tracks the Solactive GBS Hong Kong Large & Mid Cap USD Index, providing exposure to 85% of the SAR's equity market.

Home to 52 stocks, ZHOK allocates almost 56% of its combined weight to financial services and real estate stocks. Like its aforementioned peers, ZHOK would likely display limited to no immunity to a raft of selling pressure if any index providers demote Hong Kong.