Hong Kong is set to elect the next Chief Executive of the city for a five-year term on March 26, 2017. The head of the city holds significant power over the city’s activities but has little accountability to the citizens. This is because only around 1200 voters are eligible to cast votes in the election compared with 3.8 million registered voters. The committee includes 70 members of the city’s legislature, some district politicians, business groups, and some other notable residents who gather in the city’s convention center and cast their votes. Ordinary residents of Hong Kong have no say in the elections.

 

Ex-finance chief John Tsang, former chief secretary Carrie Lam, and retired judge Woo Kwok-hing are the three candidates contesting in this election. If none of the three candidates get more than half of the total votes in the first round, the two leading candidates will go on to the second round, results of which will be announced thereafter.

 

A recent poll by Hong Kong University shows John Tsang in the lead. The poll showed John Tsang with a 17 point lead to Carrie Lam while only 9% of the respondents favored Woo Kwok-hing.

 

 

Beijing holds immense power in Hong Kong. Many businesses in the region rely on support from the Chinese capital and are significantly impacted by the relations they have with them. The Chinese government has made it clear that it wants Carrie Lam to win. Chinese officials have lobbied for the candidate. However, some people believe that Lam’s win will probably not be in the best interest of Hong Kong as Beijing will then be in a position to throw its weight around (read: Asian Markets Give Mixed Signals: ETFs in focus).

 

We will now discuss the characteristics of a Hong Kong ETF:

 

iShares MSCI Hong Kong ETF (EWH Quick QuoteEWH - Free Report)

 

This fund offers exposure to equities of companies domiciled in Hong Kong. It offers a pure play to investors looking for exposure to the region.

 

EWH has AUM of $1.65 billion and charges 48 basis points in fees per year. It bears significant concentration risk as more than 58% of the fund assets are invested in the top 10 holdings. Real Estate, Financials, and Utilities comprise three-fourths of the fund. The fund returned 15.94% in the past one year and 14.27% in the year-to-date time frame (as of March 22, 2017). EWH currently has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.

 

We will now compare the performance of EWH to a broad-based China ETF, FXI.

 

iShares China Large-Cap ETF (FXI Quick QuoteFXI - Free Report)

 

This fund is the most popular ETF offering exposure to the Chinese economy. 

 

FXI has AUM of $3.2 billion and charges 74 basis points in fees per year. It bears significant concentration risk as more than 58% of the fund assets are invested in the top 10 holdings. Financials, Energy, and Telecom comprise three-fourths of the fund. The fund returned 20.01% in the past one year and 13.20% in the year-to-date time frame (as of March 22, 2017). FXI currently has a Zacks ETF Rank #3 with a Medium risk outlook (read: Investing in China in the Age of Trump and Beyond).

 

Source: Yahoo Finance

 

 

As witnessed by the chart, FXI has outperformed EWH in the past one year. However, it should be noted that in the year-to-date time frame EWH generated a higher return than FXI. Given the uncertainty surrounding the Hong Kong election, we believe it’s best to remain on the sidelines for now.

 

 

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