• Insurance Directions
• February 5, 2025

Hong Kong Dividend ETFs Soar Again

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The investment landscape, particularly within the realm of exchange-traded funds (ETFs), has witnessed notable movements recently, especially surrounding the Hong Kong marketThe discussions around the Hong Kong dividend sector have taken center stage following the brief market closure on December 25th and 26th, which was due to the holiday seasonAs trading halted, a significant uptick was observed in domestic investors’ enthusiasm for these funds, propelling a surge in investments into the A-share related ETFs focused on dividendsThis shift is reflective not only of current market dynamics but also of deeper investor sentiments.

Data compiled by Wind shows that on December 25th, amidst a total of 1,032 ETFs available in the market, the Hong Kong Central State-Owned Enterprises Dividend ETF managed by Wanjia Fund emerged as the top performer, witnessing an impressive gain exceeding 7%. It reported a premium rate of 9.18%, indicating robust investor interest

The trading volume for this ETF skyrocketed to almost 1 billion yuan, marking a staggering increase from just 210 million yuan the previous dayBy the end of trading on that day, the fund had approximately 125 million shares.

In an immediate response to the heightened trading activity, Wanjia Fund issued a premium risk alert warning investors against investing blindly in high premium rate funds, emphasizing that such movements could lead to significant lossesThis proactive communication reflected the seriousness of the investment behavior at that moment.

Close on its heels in terms of performance, the Bank ETF chosen by CMB Fund, which tracks the bank A/H index, witnessed a rare trading halt as it hit its peak intraday limitThe ETF closed with a remarkable gain of 6.94% that day, coupled with a premium rate of 6.31%. Trading volumes reached approximately 23.43 million yuan, increasing nearly tenfold from the previous day’s figures

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CMB Fund also warned on December 25th that the market price was significantly above the fund's net asset value, alerting investors yet again to the risks associated with premiums.

Over the past two months, both the Wanjia and CMB's ETFs have shown growth exceeding 20%, while the Bank ETF, since the start of the year, boasted a phenomenal increase of over 54%. This showcases a strong interest in these dividend-related products during a time traditionally marked by lower trading volumes due to seasonal factors.

Moreover, other funds, such as those managed by Huaxia Fund, have issued similar premium warningsOn December 26th, the Huatai-PB Hong Kong Dividend Low Volatility ETF and the Guotai Junan Financial Holdings’ Hong Kong Dividend ETF reached significant highs in their price movements, with both ETFs triggering the 10% trading limit and posting premium rates above 14%. The trading volumes for these two funds were substantial, hitting 234 million yuan and 363 million yuan, respectively, with turnover rates soaring to 503% and 429%. However, these products were relatively new, with limited liquidity, reflecting the speculative nature of the current market climate.

Investor enthusiasm toward the Hong Kong dividend sector can largely be attributed to several factors

First is the attractive valuation found within this marketFollowing a prolonged period of correction throughout recent years, current valuations appear relatively lowThe Hong Kong market exhibited volatility with an upward trend in December, yet it remains appealing compared to global asset valuations, particularly when considering the anticipated benefits from various policies.

Historical context is vital here; the Hong Kong Hang Seng Index has been showing a price-to-earnings (PE) ratio of 9.19 as of December 24th, 2024, hovering close to its median historical ratio of 8.97 while the price-to-book (PB) ratio stands at 0.96. Both metrics indicate that the current valuations are favorable compared to historical benchmarks.

Additionally, high dividend yield ratios play a substantial role in attracting interestWith the ongoing support of market policies aimed at enhancing value through effective capital management, state-owned enterprise dividends have garnered increased recognition within the investment community

The dip in 10-year government bonds, which have fallen below 1.7%, further underscores the appeal of dividend assets in a low-interest-rate environmentNotably, dividend yields within the Hong Kong market have historically surpassed those found in the A-share market, making them increasingly appealing to investors.

As of December 17th, further emphasis was placed on the necessity for central enterprises to enhance their core capabilities and competitiveness, driving additional investor interest toward dividend-generating assetsThe cash dividend trends of the Hang Seng Index have made a remarkable ascent since 2020, culminating in an overall annual dividend yield of 4.2% in 2023, reflecting total cash dividends amounting to approximately 857.8 billion yuan.

In an intriguing outreach, investment expert Li Bei openly promoted the attractiveness of Hong Kong state-owned enterprise ETFs, citing a compelling "6-6-6" investment thesis, referring to an ideal PE of 6, PB of 0.6, and a dividend yield of 6%. The integration of these stocks into an ETF format provides a diversified investment avenue that is accessible to regular investors, who may otherwise find direct investments in individual stocks less viable.

Li further posited that these ETFs offer a solid defense for investors while also granting substantial value, suggesting that the relative security and pricing advantages over A-shares significantly enhance their investment proposition

Such duality of strength and value reinforces investor interest in diversifying their portfolios through these funds.

However, the substantial increases witnessed in these assets pose questions regarding sustainability and risks in the long termThere are murmurs within the investment community that the current trend may deviate from the expected lower volatility that typically characterizes dividend stocksConcerns are mounting about whether such spikes can hold, especially as the broader market resumes operations post-holiday.

Some cautious investors have indicated tendencies to sell portions of their holdings, opting to wait for more advantageous buying conditions in the futureThe underlying sentiment suggests that capitalizing on perceived opportunities can often lead to unfavorable results; hence, prudent decision-making remains paramount as market dynamics can change rapidly.

In conclusion, the landscape for Hong Kong dividend ETFs remains dense with opportunity, yet riddled with volatility and risk factors that need to be navigated judiciously