The Hang Seng Index is set for an overhaul that will ultimately see its constituent membership double in size in a bid to ensure it remains representative of the evolving Hong Kong equity market.
Hang Seng has announced a major update to its flagship Hang Seng Index.
Anita Mo, Chief Executive Officer of Hang Seng Indexes, commented: “The new enhancements to the Hang Seng Index will further increase its representation and make the index more balanced and diversified.
“Building on our market history of more than 50 years, these enhancements will ensure that the index remains the most important benchmark of the Hong Kong stock market and will continue to grow and evolve to keep pace with the market.”
The changes, which will be implemented following the upcoming May 2021 review, reflect the findings of a month-long stakeholder consultation.
Changes
The index currently consists of 52 Greater China companies that are listed on the Main Board of the Stock Exchange of Hong Kong. Primary and secondary share listings, as well as real estate investment trusts (REITs), are all eligible for inclusion.
Hang Seng plans to enhance the index’s diversification through a series of regular reviews, targeting a composition of 80 stocks by mid-2022. The index provider has indicated it plans to ultimately fix the number of constituents at 100.
To achieve a more balanced representation of the Hong Kong stock market, the index will target a market capitalization coverage of at least 50% from each of seven major industry groups: financials; information technology; consumer discretionary and consumer staples; properties and construction; utilities and telecommunications; healthcare; and energy, materials, industrials, and conglomerates. The net result is expected to be less concentration in stocks from the financials sector which currently accounts for a total index weight of roughly 40%.
In a bid to fast-track the addition of newly listed start-ups, Hang Seng will relax the current listing history requirement to just three months for certain qualifying companies.
To preserve the representation of local firms in an index that has become increasingly represented by mainland Chinese companies, Hang Seng will ensure that at least 20 to 25 Hong Kong domiciled constituents are maintained in the index. The number of Hong Kong constituent stocks in the index will be evaluated at least every two years.
Finally, the index will incorporate a weight cap of 8% on any stock across the whole index. In practice, this reduces the current cap of 10% for Hong Kong domiciled companies but increases exposure to secondary listings, such as technology titan Alibaba, which are currently capped at 5%.
ETFs
The changes will ultimately affect ETFs linked to the index. Most of these are listed in mainland China or in Hong Kong, the largest of which is the HK$50 billion ($6.5bn) Hang Seng Index ETF (2833 HK) from Hang Seng Investment Management.
BlackRock and State Street Global Advisors also offer Hang Seng Index ETFs in Hong Kong, while ChinaAMC, CSOP Asset Management, Yuanta Securities, Global X, and Samsung Asset Management all offer inverse and leveraged ETPs referenced to the index.
In Europe, Lyxor offers the Lyxor Hong Kong (HSI) UCITS ETF (LHKG GY) which houses €130 million and comes with an expense ratio of 0.65%.
There are no US-listed ETFs tracking the Hang Seng Index.