The Tracker Fund of Hong Kong (TraHK), with $12.7bn in AUM, is the territory’s oldest and largest Hong Kong equity ETF.
The Tracker fund has its origins in the late 1990s when the Hong Kong government intervened to fight currency speculators and ended up buying HK$120bn ($15bn) worth of stocks to prop up the stock market. To offload the shares, in 1999 the government launched the Tracker fund and encouraged the public to buy it, offering purchase incentives. Reportedly it made a profit of HK$30bn from the sale of its holdings.
But much has changed since the fund’s inception. Exposure to mainland Chinese companies has grown dramatically over the years to constitute a majority of the holdings.
At the end of 2000, the first full calendar year of TraHK’s existence, mainland companies made up 24% of the holdings, dominated by one company, China Mobile (20.4%).
At the end of 2017, mainland companies accounted for around 56% of the holdings.
Tencent now represents 8.9% of the fund, China Construction Bank 8.3% and China Mobile is 5%.
The biggest Hong Kong companies, HSBC and AIA, represent 10.2% and 8.9%, respectively.
The changing nature of the fund provides a quantitative view of China’s integration into the SAR.
As many Chinese companies chose to list in Hong Kong, many of the listings were added to the Hang Seng Index, thus increasing the exposure of TraHK to the mainland economy.
A surge of Chinese companies came in the 2004-2008 period. China Construction Bank, China Life Insurance, Industrial and Commercial Bank of China, Petrochina, Ping An Insurance and Tencent were added to the fund. In 2008, they collectively accounted for 24% of the holdings.
Exposure to mainland China companies in the Tracker Fund of Hong Kong
Data: State Street Global Advisors, TraHK annual reports
The tracker fund follows the Hang Seng Index of companies listed on the Hong Kong exchange, which includes several mainland businesses, or their subsidiaries listed in the territory. The index holds 50 names, selected from among the largest and most liquid stocks listed on the Hong Kong exchange, including shares of mainland companies (H-shares).
If the Hong Kong exchange allows listings with weighted voting rights structure, which are under consideration, this will likely attract more mainland listings, in particular the tightly held internet giants. The new listings will likely get included in the Hang Seng Index, skewing the exposure of TraHK even further towards the mainland.
Investors interested purely in Hong Kong equities may soon have to look outside the flagship Tracker fund.
