The MSCI Hong Kong iShares (EWH) is an exchange-traded fund (ETF) that invests in a basket of stocks that represent an index of the Hong Kong stock market. Although the fund holds a large number of different companies, its largest ten holdings account for nearly 70% of EWH's value. In fact, Hutchison Whampoa Ltd. alone accounts for a whopping 14.5% of the fund's net asset value!

Please note that you can trade the largest holdings in the fund on the Pink Sheets in the United States as American Depositary Receipts (ADRs). I have provided the ticker symbols for these stocks in the spreadsheet below. Some brokers do not allow you to buy and sell Pink Sheet issues, and these companies might not file financial data with the SEC. In many cases, the ADRs are not liquid and bid/ask spreads may be very wide.

I have read many times that the Hong Kong stock market often leads the Nasdaq, as Hong Kong is a large exporter in the technology world. However, if you look at the make-up of EWH, one would question that thinking. Almost 43% of the fund's holdings are involved in the real estate and banking sectors. Meanwhile, capital goods account for 16% of the fund, and some of that might be technology oriented. Still, the largest pure technology play in the fund is telecom, which only accounts for 2.24% of the fund's value. I also ran some lead and lag correlations and find no such relationship between EWH and the Nasdaq. If anything, recent history has seen Hong Kong lag the U.S. markets.

Overall, EWH does not have a very tight correlation with the U.S. market. Part of this is because large moves in American stocks are reflected in the next day's Hong Kong trading. With a correlation in the 60% range, EWH should provide some positive diversification effects to your portfolio.

In prior articles regarding International funds, I warned that changes in the dollar's value can have an immediate effect on the value of your stocks. If the Japanese stock market rises 5%, but the dollar rises 5% against the yen, then a Japanese fund would be unchanged in dollar terms. However, in this case, the Hong Kong dollar does not float. Instead, the government maintains the currency rate near 7.80 Hong Kong dollars for one U.S. dollar.

That does not completely remove currency risk from the equation here, though. The Hong Kong stock market may fall sharply when there are trade tensions, and the United States wants China to let its currency and the Hong Kong dollar float. Most analysts expect these currencies would surge in value if that happened. That, of course, would add substantially to the value of such a fund. However, strong gains in the currency would hurt the stock market in Hong Kong because it would make their exported goods much more expensive. Furthermore, if capital controls were removed and Chinese were able to move their money out of the country, then you could see an enormous move out of China, which could hurt the value of the Chinese and Hong Kong currencies. There is no way of knowing exactly what might occur in the future here, though I doubt that the currency will be allowed to float for a long time to come.