"If you want to see capitalism in action, go to Hong Kong." ~ Milton Friedman
Hong Kong has come a long way. As a British colony, it was described as a “barren rock” by former British foreign secretary and prime minister Lord Palmerston.
Yet, as of December 2023, the Hong Kong Stock Exchange (HKEx) was the seventh-largeststock exchange in the world and the fourth-largest stock exchange in Asia by market capitalization.
Read on for some direct and indirect routes that investors can take to gain exposure to companies listed on the HKEx.
Key Takeaways
- Investing in exchange traded funds (ETFs) is a simple way for investors to gain exposure to Hong Kong securities without being exposed to currency risk.
- Investors in the United States can purchase a limited number of Hong Kong stocks listed as American depositary receipts (ADRs) on the New York Stock Exchange, Nasdaq, and over-the-counter exchanges.
- Investors can also trade Hong Kong stocks by opening an account with a brokerage firm that offers an international trading platform.
Trading on the Hong Kong Stock Exchange
Since the British handoff in 1997, Hong Kong and mainland China have operated under the principle of one country, two systems.
Hong Kong is called a special administrative region (SAR) and is free to pursue capitalism and manage its own taxes, money, trade, foreign exchange, and currency (the Hong Kong dollar).
In November 2014, the Shanghai-Hong Kong Stock Connect was launched. It established a cross-border channel for access to stock markets and investment. This arrangement allowed investors in mainland China and Hong Kong to trade specified companies listed on each other’s stock exchange through local securities firms.
Exchange-Traded Funds
The easiest way for U.S. investors to gain exposure to Hong Kong's securities is through exchange-traded funds (ETFs). These funds provide diversification as well as ease of trading without the currency risk. Popular exchange traded funds in the category includeiShares MSCI Hong Kong ETF and Franklin FTSE Hong Kong ETF.
The iShares MSCI Hong Kong ETF (EWH) is invested primarily in large- and mid-cap companies in the financial and real estate space. The fund, launched in 1996, is diversified across 33 holdings and, as of Jan. 25, 2024, managed net assets worth $510.3 million. It has an expense ratio of 0.50%.
The Franklin FTSE Hong Kong ETF (FLHK), launched in 2017, also provides exposure to large- and mid-cap companies in Hong Kong. The fund has 76 holdings and as of Jan. 24, 2024, managed $10.17 million in assets. It has a low expense ratio of 0.09%.
American Depositary Receipts
Investors in the U.S. can select Hong Kong stocks listed as American depositary receipts (ADRs) on the New York Stock Exchange (NYSE), the Nasdaq, or over-the-counter (OTC) exchanges.
ADRs are a hassle-free way to own foreign stocks as they are traded on U.S. exchanges and can be bought just like common shares through a brokerage account.
The drawback with ADRs is the limited choice; only a few Hong Kong stocks are registered as ADRs on U.S. exchanges. In fact, as of Jan. 14, 2024, such ADRs numbered eight. More are available in the OTC markets, however. As of the same day, there were 113.
Some popular Hong Kong ADRs include AIA Group Ltd. (AAGIY), Sun Hung Kai Properties Limited (SUHJY), and Hysan Development (HYSNY).
Invest Directly Through a Broker in Your Country
ETFs are an indirect way to hold stocks on the Hong Kong Stock Exchange.ADRs are a direct way to own them, but choices are seriously limited.
Investors who are keen on participating directly and widely on the Hong Kong Stock Exchange can open a brokerage account with a brokerage firm in their own country that offers a platform for international trading.
Foreign companies must register with the U.S. Securities and Exchange Commission (SEC) to be offered as ADRs.
Brokerage firms that offer international access generally offer many international exchanges, including Hong Kong’s. Make sure to research brokers thoroughly before trading with them.
Check the account type (discretionary or non-discretionary), the commission structure, and regions and countries covered. In the United States, look for SEC registration along with membership in the Securities Investor Protection Corporation (SIPC) and the Financial Industry Regulatory Authority (FINRA).
Some of the prominent U.S. brokerage firms for trading foreign stocks are Interactive Brokers, E*TRADE, Fidelity Investments, and Charles Schwab.
Invest Directly Through a Hong Kong Based Broker
Investors from across the globe can invest online through local stockbrokers based in Hong Kong. However, there are restrictions on residents of certain countries and certain hurdles Hong Kong brokers must clear to offer services.
In the U.S., for example, financial institutions not registered with the SEC cannot solicit U.S. citizens as clients.
In addition, the Foreign Account Tax Compliance Act (FATCA) implemented additional restrictions. As a result, some Hong Kong brokers avoid U.S. clients. However, residents of other nations may not face the same kinds of issues.
Can I Trade Hong Kong Stocks?
Yes, U.S. investors can trade Hong Kong stocks through ETFs, though you do not own the stocks outright. Conversely, you may purchase ADRs of Hong Kong companies that trade on U.S. exchanges or in OTC markets. Furthermore, you can invest directly with brokers in the U.S. or in Hong Kong. All trading must comply with SEC regulations.
Is the Hong Kong Stock Exchange Part of China?
The HKEx traded separately outside of China when Hong Kong was a British territory. In the late 1990s, when Hong Kong was returned to China, it became a special administrative region (SAR), operating under the principle of one country, two systems. This means that while the HKEx is part of China, it is not fully part of China's stock market (which the Shanghai Stock Exchange dominates).
What Is the Largest Stock Exchange in the World?
The New York Stock Exchange is the largest stock exchange in the world. As of December 2023, the exchange had a market capitalization of about $25.6 trillion.
The Bottom Line
The Hong Kong Stock Exchange can be a great alternative for investors looking to diversify their portfolios beyond U.S. or European stocks.
Investors should choose their preferred route to the Hong Kong Stock exchange after understanding the costs, risks, tax considerations, and regulatory compliance related to each investing option.
On the whole, investors should take care to base their investment decisions on a variety of data, including company earnings and economic factors. Don't rely only on price movements.
