A Bearish Call on the Hong Kong ETF

Over the past year, investors looking to access China via a run-of-the-mill, large-cap focused exchange traded fund have been served with the iShares MSCI Hong Kong ETF (NYSEArca: EWH) than the iShares China Large-Cap ETF (NYSEArca: FXI).

FXI can lay claim to being the largest, most heavily traded China ETF, but it is also lower by nearly 11% over the past year. During the same time, EWH is higher by 6%. EWH and the Hang Seng China Enterprises Index, which is comprised of Chinese companies listed in Hong Kong, have benefited from some important catalysts. That list includes Goldman Sachs last month saying that the Hang Seng could surge 19% this year. [Hong Kong High for This ETF]

Not all investors are a believer in that thesis.

“The Hong Kong banking system is heavily exposed to mainland China. When things finally go belly-up, there could be a banking crisis in Hong Kong,” said Felix Zuluaf, president of Zulauf Asset Management, at the Barron’s Roundtable.

Noting that the Hong Kong dollar is pegged to the U.S. dollar, Zuluaf added that ” the Hong Kong economy is rate-sensitive because it is based on finance, real estate, and construction.” Zuluaf said at the Barron’s Roundtable that he recommends shorting the Hong Kong economy via a short position in EWH.

Like FXI, the $2.3 billion EWH is heavily exposed to the financial services sector. That group represents 57.1% of the ETF’s weight, nearly triple the allocation devoted to consumer discretionary stocks, EWH’s second-largest sector weight.