Following a change in policy by the Biden administration, iShares has announced that it will no longer be prohibited from investing in sanctioned Chinese companies. Here’s how these changes will affect investors.

  • Heather Lim | Published on 30 Jul 2021

• Beginning 2 August 2021, the iShares Hang Seng TECH ETF will resume making investments into sanctioned Chinese companies, reversing a policy that it undertook six months ago.• With these changes, investors can expect the tracking difference between the ETF and its underlying index to narrow.• We reiterate that the iShares Hang Seng TECH ETF (HKEX:3067) is still our top pick for exposure to China’s tech sector.  

iShares Hang Seng TECH ETF will resume investment in sanctioned companies 

Good news for all investors of the iShares Hang Seng TECH ETF (HKEX:3067). Following the changes in the latest executive order issued by the Biden administration, the fund will no longer be prohibited from investing in sanctioned Chinese companies. 

This marks a major policy reversal from six months ago, where the manager of the fund announced that it will cease making any new investments in sanctioned Chinese companies in order to comply with the executive orders issued by the Trump administration. 

Following the new executive order signed by President Biden on 3 June 2021, the manager has obtained further clarification from the Office of Foreign Assets Control, and has determined that the executive order will not apply to the Sub-Funds as long as they are not offered to US persons. 

As a result, beginning 2 August 2021, the iShares Hang Seng TECH ETF will continue investing in all constituent companies of the Hang Seng Technology Index, including sanctioned companies, to truly reflect its performance. 

However, with this new change, the iShares Hang Seng TECH ETF will no longer be appropriate for US persons. The manager requires all existing US persons to redeem, sell or transfer the units of the fund by 2 August 2021.

Tracking difference expected to improve 

In our previous update, we noted that SMIC (HKEX:981) and Xiaomi (HKEX:1810) are the only two companies in the fund that were affected by the restrictions. Earlier in May, Xiaomi was removed from the entity list and has since been added back to the fund with a current weightage of 8.55% as of 28 July 2021. 

From 2 August 2021, SMIC will also be added back into the fund. We view this favourably as SMIC is a key player in China’s national drive to grow its domestic semiconductor industry and reduce dependence on foreign technology. With these changes, investors can expect the tracking difference of the ETF to improve.  

Table 1: Constituent weightings of the ETF vs. the underlying index
Company NameETF Weight (%)Index Weight (%)Difference (%)
Alibaba12.0712.070.00
Sunny Optical Technology8.618.62-0.12
Xiaomi8.558.56-0.12
Tencent Holdings7.097.090.00
Meituan6.636.64-0.15
JD.com6.486.480.00
SMIC6.266.260.00
 Kuaishou5.385.380.00
 JD Health4.554.56-0.22
Haeir Smart Home3.403.400.00
Source: Bloomberg Finance L.P., Hang Seng Indices, iFAST CompilationsData as of 28 Jul 2021

iShares Hang Seng TECH ETF is still our top pick 

Overall, we view the recent developments positively and we would like to reiterate that the iShares Hang Seng TECH ETF (HKEX:3067) will continue to remain on our ETF Focus List.
Previously, we recommended the ChinaAMC Hang Seng TECH Index ETF (HKEX:3088) and the Lion-OCBC Securities Hang Seng TECH ETF (SGX:HST) as alternatives for investors who have concerns about the higher tracking difference. But in light of the recent changes, tracking difference concerns should no longer be a reason for investors to penalise the iShares Hang Seng TECH ETF. 
With the lowest expense ratio among its peers at just 0.25%, decent liquidity, and assets under management (Table 2), the iShares Hang Seng TECH ETF (HKEX:3067) certainly deserves a place on our ETF Focus List and will continue to be our recommended ETF for investors who are seeking exposure to China’s fast-growing technology sector.

Table 2: List of ETFs that track the Hang Seng TECH Index
ETFExpense Ratio (%)Average Daily Volume (millions)AUM (HKD millions)Tracking Difference YTD (%)
iShares Hang Seng TECH ETF (HKEX:3067)0.258.3 7,851-0.70
ChinaAMC Hang Seng TECH Index ETF (HKEX:3088)0.601.7 810-0.49
Lion OCBC Securities Hang Seng TECH ETF (SGX:HST)0.452.2 1,343-0.65
CSOP Hang Seng TECH Index ETF (HKEX:3033)0.9938.7 9,766-0.66
Hang Seng TECH Index ETF (HKEX:3032)0.874.81,689-0.59
Source: Bloomberg Finance, Issuer WebsitesData as of 29 Jul 2021