ETF Trends
ETF Trends

Chinese stocks have been emerging markets laggards this year, but the world’s second-largest economy has recently seen its equity markets start to shed some of that laggard status. Investors looking to play that rebound may want to consider Hong Kong and the iShares MSCI Hong Kong ETF (NYSEArca: EWH) or the iShares China Large-Cap ETF (NYSEArca: FXI), the largest China-related ETF trading in the U.S.

EWH also has to contend with U.S. interest rate policy because the Hong Kong dollar is pegged to the U.S. dollar. Additionally, the ETF’s significant finance, real estate, and construction makes its vulnerable to changes in Fed policy. The Chinese territory has an AAA credit rating.

SEE MORE: Are China ETFs Ready to Rally?

Just as investors departed FXI earlier this year, EWH was hit by outflows as well. However, stocks listed in Hong Kong still offer substantial discounts relative to their mainland counterparts. The issue is getting foreign investors to renew their interest in Hong Kong shares.

“Foreigners, however, are still sitting on the sidelines of the Chinese market, despite buying other major emerging markets in the last few months,” reports Shuli Ren for Barron’s. “Year to date, they’ve sold $3.4 billion in China stocks and another $1.9 billion of Hong Kong companies’ stocks. But sentiment could change. In the last week, foreigners turned net buyers, pumping in $912 million, the largest weekly flow in five months.”

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Over 260 U.S.-listed ETFs feature some exposure to China with marquee names including the iShares China Large-Cap ETF, which is the largest China-related ETF that tracks Chinese companies listed on the Hong Kong stock exchange. H-shares, or the Chinese stocks trading in Hong Kong are some of the least expensive stocks in the world and FXI has a price-to-earnings ratio below that of the MSCI Emerging Markets Index.

Related: 15 Cheap Emerging Market ETFs

The recently unveiled Shenzhen-Hong Kong connect could be another catalyst for Hong Kong stocks as more mainland investors will have access to offshore equities. Mainlanders will have access to 417 Hong Kong-listed stocks, a third more than the through the Shanghai link, with the addition of small-caps.

Even after the recent rally, the Hang Seng Index has reached only a nine-month high, while the Hang Seng China Enterprises Index, or H-shares index, has broken even just this year, and trades at only 7.6 times earnings,” according to Barron’s.

For more information on the Chinese markets, visit our China category.

iShares MSCI Hong Kong ETF

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.