China Market

Lion-OCBC Hang Seng Tech ETF (SGX:HST) – Riding the Chinese Technology Wave?

Calvin Lo

Lion Global Investors and OCBC Securities recently tied up to list an ETF tracking the Hang Seng TECH Index on SGX, called the Lion-OCBC Securities Hang Seng TECH ETF (SGX:HST/HSS). Note: HST is the S$ counter and HSS is the US$ counter. The ETF was listed on SGX on 10th December 2020.

Top 10 Holdings (as of 30th September 2020)

Information taken from ETF Brochure. Top 10 holdings have changed slightly in their latest indicative holdings document, but the brochure gives us a good idea of what type of companies this ETF holds. IT sector naturally makes up 68%. Notably, there are companies in other sectors which are included because they are tech-related or enabled.

Performance

According to Hang Seng Indexes website, the Hang Seng TECH Index returned 78% over the past 1Y. Note the disclaimer that information prior to index launch date is back-tested, i.e. hypothetical.

By plotting the top 6 companies listed over the past 1Y, we can see that 4 of them outperformed the iShares MSCI China ETF (MCHI) which returned 25% in the last 1Y. Only Sunny Optical 2382.HK underperformed, and Alibaba 9988.HK matched MCHI performance (likely because Alibaba is the largest constituent in MCHI).

Thus, HST potentially outperforms MCHI, Tencent 0700.HK, Alibaba, and Sunny Optical over the past 1Y. Not too shabby. This is likely because any stock in HST is capped at 8% weight, so Alibaba and Tencent positions are capped and are much lower in weight than in MCHI. Consequently, more weight is given to other smaller Chinese companies like Meituan 3690.HK, Alibaba Health 0241.HK and Xiaomi 1810.HK, which have outperformed significantly the past 1Y.

Pros

  • Smaller investment amount required
    • Since the minimum trading board lot size for HST is only 10 shares, one can invest for as little as S$14 (based on HST price S$1.362/share as of 14th Dec 2020). Of course, this won’t make sense if you include fees and/or brokerage commissions but one can decide how much to invest in increments of only 10 shares.
    • In contrast, HK-listed counter Tencent for example has minimum trading board lot size of 100 shares, amounting to around HKD57,100 or around S$9,800 (based on 0700.HK price HKD571/share as of 14th Dec 2020). For a small investor, this may be prohibitive expensive.
  • Passive investment – no need for investors to pick stocks and rebalance holdings, note that ETF itself is more active than the usual benchmark index ETF which are generally market cap-weighted (if you’re curious you can look into the index methodology in their pitchbook on OCBC Securities website, link below)
  • Participate in growth of Chinese tech companies, e.g. Alibaba, Tencent, Meituan, Xiaomi
  • IPO fast entry feature – China also has some of the world’s most valuable unicorns, e.g. Ant Financial, ByteDance, Didi Chuxing
  • Denominated in SGD and USD – no need for investors to incur additional forex costs
  • US-China trade tensions – US-listed Chinese companies increasingly seeking secondary listing in HK Secondary flotations of US-listed Chinese firms buoy 2021 outlook as Hong Kong lands second place in world IPO rankings | South China Morning Post (scmp.com)

Cons

  • Not much historical performance data on underlying index, Hang Seng Tech Index launched only in July 2020 – Hang Seng Indexes website does provide hypothetical back-tested performance though
  • No information on tracking difference/error yet
  • Expense ratio not cheap (capped at 0.68% per annum for first 2 years from Fund inception; management fee at 0.45% per annum)

Risks

My Thoughts

From my research so far, this ETF is a really interesting proposition. I believe in the long-term potential of Chinese tech companies. I’m also already heavy into US tech companies so getting some exposure into Chinese ones would be a good diversifier.

However, I’m worried about investing into an ETF without much actual historical performance. I would also like to monitor for a bit longer the developments with Chinese regulators and the China-HK relationship.

That said, I might just initiate a small position first and add to it as I do more research and see positive developments. China and tech is definitely a growth story I’m bullish on.

Links

Disclaimer: I’m not a financial adviser and this is not financial advice. I’m just sharing my thoughts on investments. Please do your own due diligence before making any investments based on what I’ve shared. If you are still unsure, seek advice from a professional financial adviser.

Disclosure: I don’t have a position in HST or HSS, but I’m long Alibaba BABA.