Impacted by the frustrating Covid-19 pandemic, the global economic recovery momentum was interrupted after the peak in the middle of last year. There is no exception to the US. The economic growth and corporate earnings in the US will see obvious fall-back from 2021’s high. The risk premium of US stocks is expected to rebound from the low level. At the same time, the Fed took a sharp turn towards a tightening monetary policy. It is estimated that the real yields of US equities may rebound, suppressing their valuations.
The Asian technology sector becomes more attractive as the valuation of the US and China’s tech sector fell. While the Chinese technology stocks were hit by the regulatory crackdown and other policy factors, the Asian tech sector can also cover technology companies in other regions, including South Korea, Japan and Taiwan. The earnings growth of these companies remains strong this year. This sector simultaneously provides indirect channels to invest in the cheapened Chinese technology stocks. Overall, the MSCI Asia Tech Index, which represents the tech sector in Asia, significantly outperformed the MSCI Asia (ex-Japan) Index by a 16.4 basis point last year. We expect this sector to remain strong and beat the overall Asian equity market. As such, ETFs are a good way to allocate capital into this sector. Currently, there are two ETFs covering Asian technology stocks in the Hong Kong market, namely Premia Asia Innovation Technology ETF (3181.HK) and Global X Asia Innovator Active ETF (3058.HK). We will compare their features with pros and cons in this article.
Premia Asia Innovation Technology ETF (3181.HK)
Premia Asia Innovation Technology ETF (3181.HK) has been listed on HKEX since 6 August 2018. It adopts an optimised representative sampling strategy and tracks the investment results of the Premia FactSet Asia Innovative Technology Index. While the ETF may not hold all the securities included in the index, it will remain highly similar to the index on the whole. It is worth mentioning that this index is compiled by an ETF manager Premia Partners and partners with FactSet. Premia Partners has unique insights into future technology development, believing that many Asian innovative tech companies are driving the innovative tech sector from Asia to the world. It also suggests that Asia will lead the AI race. Premia partnered with FactSet to leverage its Revere Business & Industry Classification System (RBICS), which provides a methodology to classify Asian listed companies by revenue. Investors can therefore capture the opportunities from the Megatrends in China, such as Digital Transformation, Healthcare Innovation, and Robotics & Automation.
The index currently holds 50 stocks, but the top 10 only take up 22.35% in total, with a weighting of 2.15%~2.31% each, which means it has a relatively diverse investment. The pandemic prompts a worldwide digital economy transformation. The semiconductor industry is probably the most crucial sector in innovation and technology development, which has a structural growth in the past two years. So, of course, there are many well-known semiconductor companies in this index’s top 10 holdings, such as MediaTek, Hynix, Tokyo Electron, and Samsung Electronics. Additionally, to capture the opportunities in robotics and automation, INNOVANCE–a leading industrial automation company in China, HIKVISION–a leading security and AI company in China, and MURATA–a leading global manufacturer of electronic components based in Japan are all included in the index.
Regarding the sector allocation, IT, the most representative sector of the new economy occupies the largest proportion (36.54%), followed by communication services (18.58%) and consumer discretionary consumer (14.78%), which totally accounts for around 70% of the index. In terms of the geographic allocation, China is leading the way (46.21%), followed by Japan (29.16%), South Korea (13.90%), and Taiwan (8.64%). China's enormous market and state-led policies support the rapid technological development and adoption in the domestic market. Thus, with this huge potential, it is easy to understand why a huge portion of the fund is allocated to China.
Figure 1: Sector Breakdown and Top Weightings
Global X Asia Innovator Active ETF (3051.HK)
Global X Asia Innovator Active ETF (3051.HK) is another HK-listed ETF with an Asian Tech theme. It is launched on 10 December 2021. This ETF employs an actively managed investment strategy, so it doesn’t track any index or benchmark. Mirae Asset, the ETF’s manager, has her own investment philosophy. She believes that business leaders in the innovative sector would take advantage and develop the market potential in new technologies, and benefit from new industry conditions in the dynamically changing global economy. Mirae Asset has a wider definition of the “innovative business”, it includes 5G & Internet, Autonomous & Electric Vehicles, Clean Energy, E-commerce, Cloud Computing, Cybersecurity, Fintech, Healthcare Innovation, Robotics & Artificial Intelligence, Semiconductor and others as well.
Currently, this ETF has 49 constituents, as the top ten holdings have occupied 40.28% of the index, it is relatively concentrated. As this ETF employs a different selection method from 3181.HK, only Samsung Electronics and Mediatek are included in both ETFs. Furthermore, this ETF covers a wide range of stocks in the innovative industry, and the remaining holdings come from various themes. LONGi, which is the world’s leading photovoltaic product manufacturer, and Contemporary Amperex, which focuses on power battery manufacturers, are from “clean energy”. Tencent, as well as Southeast Asia E-commerce and the gaming leader, Sea Ltd, are from “e-commerce and video game”. This reflects the feature of this ETF again: only tracking the Asian tech sector but also innovative leaders among different industries.
As to sector allocation, Information technology occupies the largest portion of the index (37.88%), followed by communication services (16.83%) and discretionary consumption (14.33%). They totally account for more than 70% of the whole portfolio. As for geographical allocation, the proportion of China is the largest (58.13%, which weighs even heavier than is 3181.HK), followed by South Korea (12.57%) and Taiwan (10.89%).
Figure 2: Sector Breakdown and Top Weightings
Figure 3: Geographical Allocation
To conclude, the above two indexes both have their pros and cons. Investors should select based on their own goals and needs. For those who want to focus on Asian innovative technology, Premia Asia Innovation Technology ETF (3181.HK) is a better choice. At present, 3181.HK's assets are relatively large, and its recurring expenses are only 0.50% per year, which is favoured by most investors. However, the industry investment risk of 3181.HK is relatively concentrated, and the average daily trading volume is relatively small. Investors who wish to invest in the Asian tech sector and the most innovative companies can choose Global X Asia Innovator Active ETF (3051.HK) instead. However, its recurring expense is 0.70％, which is slightly higher than that of 3151.HK. Besides, its top weighting takes up a larger proportion, which means that it has higher concentration risks. Lastly, this ETF is newly incepted, and it does not track the benchmark, so there is not enough track record to analyse its investment goal and performance.