• The iShares Hang Seng TECH ETF (HKEX:3067) will cease making new investments in sanctioned Chinese companies from 1 February 2021 onwards.
• As a consequence of the restrictions, investors should expect the tracking difference between the ETF and its underlying index to increase.
• The current situation remains extremely fluid, and could reverse as the Biden administration begins a thorough review of its predecessor’s policies.
• Investors who are concerned about the potentially higher tracking difference of 3067 can consider switching into alternatives, such as the ChinaAMC Hang Seng TECH Index ETF (HKEX:3088) or the Lion-OCBC Securities Hang Seng TECH ETF (SGX:HST), for the time being.
iShares will cease new investments in sanctioned Chinese companies
On 29 January 2021, BlackRock Asset Management North Asia Limited, the manager of the iShares Hang Seng TECH ETF (HKEX:3067) announced that the fund will cease making new investments in sanctioned Chinese companies from 1 February 2021 onwards.
This is to comply with the executive orders issued by the Trump administration, forbidding all US persons from investing in the securities of companies that are deemed to be Chinese military companies. At the moment, the US authorities have identified 44 companies that it claims have ties to the Chinese military, two of which – SMIC (HKEX:981) and Xiaomi (HKEX:1810) – are held by the ETF.
According to the executive order, once a company has been blacklisted, there will be a 60-day grace period before the prohibition on such investments comes into effect. In addition, all US persons will also have to divest their holdings of these blacklisted securities by 11 Nov 2021.
As a consequence of the restrictions, the weighting of the sanctioned companies within the ETF will deviate from the underlying index, and investors should expect to see the ETF performance diverging from the index i.e. the tracking difference will increase. As of 10 Feb 2021, SMIC and Xiaomi make up 5.23% and 5.78% of the ETF respectively (Table 1).
Table 1: Constituent weightings of the ETF vs. the underlying index
|
Company Name |
ETF Weight |
Index Weight |
Difference |
|
Meituan |
9.51% |
9.51% |
0.00% |
|
Tencent |
8.21% |
8.22% |
-0.01% |
|
Sunny Optical |
8.12% |
8.10% |
0.02% |
|
Alibaba |
7.45% |
7.46% |
-0.01% |
|
JD Health |
6.93% |
6.93% |
0.00% |
|
JD.com |
6.20% |
6.16% |
0.04% |
|
*Xiaomi |
5.78% |
5.78% |
0.00% |
|
Alibaba Health |
5.60% |
5.61% |
-0.01% |
|
SMIC |
5.23% |
5.53% |
-0.30% |
|
Kingdee |
4.39% |
4.36% |
0.03% |
|
Source: Bloomberg Finance L.P., Hang Seng Indices, iFAST Compilations *60-day grace period for Xiaomi is currently in effect Data as of 10 Feb 2021 |
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Situation remains fluid, executive orders could be reversed
Right now, the situation remains extremely fluid as the Biden administration has announced that it is planning to conduct a thorough review of its predecessor’s policies pertaining to the ban on investments in Chinese companies, signaling that the executive orders could be reversed.
Besides that, recent events, such as the NYSE flip-flopping on its decision to delist the American depository receipts of three Chinese telecom firms on the blacklist, has demonstrated to us that the executive orders issued by the Trump administration are unclear, and they have caused plenty of confusion among market participants.
While State Street Global Advisors (SSGA) initially said it would stop buying shares of blacklisted companies for its ETFs to comply with the executive order, the asset manager made a sudden U-turn in its decision just two days later, saying that neither its regional Asian company nor its ETFs qualifies as a US person, and is thus exempted from the executive orders. Given that Blackrock is in a similar position as SSGA, there is a possibility that it could also adopt the same approach as well.
What should investors do?
Considering how dynamic the situation is today and the possibility that the executive orders might be reversed, we have decided to retain the iShares Hang Seng TECH ETF (HKEX:3067) on our ETF Focus List for the time being as it continues to rank favourably compared to its peers on several metrics.
We believe that, in time to come, we will have greater clarity on the situation once the Biden administration completes its review of the policies. In the meantime, we will continue to monitor the situation closely and provide updates should the situation evolve further.
Investors who are concerned about the potentially higher tracking difference of the iShares Hang Seng TECH ETF (HKEX:3067) can consider switching to alternatives, such as the ChinaAMC Hang Seng TECH Index ETF (HKEX:3088) or the Lion-OCBC Securities Hang Seng TECH ETF (SGX:HST), for the time being.
With an expense ratio of 0.6%, ChinaAMC Hang Seng TECH Index ETF is the next best alternative in terms of cost. Meanwhile, the Lion-OCBC Securities Hang Seng TECH ETF may appeal to local investors because it is the only SGX-listed ETF tracking the Hang Seng TECH Index and is denominated in SGD.
Table 2: List of ETFs that track the Hang Seng TECH Index
|
ETF |
Expense Ratio |
Average Daily Volume (millions) |
AUM (HKD millions) |
Tracking Difference YTD |
|
iShares Hang Seng TECH ETF (HKEX:3067) |
0.25% |
4.0 |
5960 |
-0.33% |
|
ChinaAMC Hang Seng TECH Index ETF (HKEX:3088) |
0.60% |
1.5 |
501 |
-0.54% |
|
Lion OCBC Securities Hang Seng TECH ETF (SGX:HST) |
0.68% |
1.7 |
795 |
-0.56% |
|
CSOP Hang Seng TECH Index ETF (HKEX:3033) |
1.05% |
26.5 |
6750 |
-0.36% |
|
Hang Seng TECH Index ETF (HKEX:3032) |
0.87% |
3.3 |
928 |
-0.56% |
|
Source: Bloomberg Finance, Issuer Websites Data as of 16 Feb 2021 |
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