By Russell Rhoads,
head of research
The Hong Kong Exchange had a very busy 2020, from streamlining the IPO process to adding MSCI derivatives to their suite of offerings. A move that got the attention of many traders and investors was the creation of the Hang Seng Tech Index. The Hang Seng Tech Index was introduced to the market place in July this year as a compliment to the well-known Hang Seng Index. The Hang Seng Index technology stock weighting are relatively low for a broad based index so the new Tech Index is a good compliment to the Hang Seng Index as an indicator of equity performance in the APAC region.
The Hang Seng Tech Index has been compared by some market observers to the Nasdaq-100, which is considered a technology benchmark in the U.S. The heavy technology weighting is not the only similarity to the Nasdaq-100 as of the 31 stocks currently in the Hang Seng Tech Index, seven represent just over 50% of the market capitalization of the index. The performance of the Nasdaq-100 is similarly influenced with the top six members of the index representing over half the value of the index. The table below lists the top seven members of the Hang Seng Tech Index as of Wednesday Jan. 20.
The Tech Index is rebalanced once a quarter and upon rebalancing each component is not permitted to exceed 8%. This 8% cap avoids performance being dominated by even fewer stocks. Also, the index has a criteria referred to as ‘Fast Entry’ where a newly listed security will be added to the index if the market cap ranks within the top 10 of the existing constituents on its first trading day.
Exchange traded funds quickly followed the introduction of the Hang Seng Tech Index with the CSOP Hang Seng Tech Index ETF (3033 HK) and Hang Seng Tech Index ETF (3032 HK) both launching in late August. In September the China AMC Hang Seng Tech ETF (3088 HK) and iShares Hang Seng Tech ETF (3067 HK) funds were launched. The four Hang Seng Tech Index ETFs are listed below in order of launch.
Demand for these ETFs has been nothing short of amazing with the cumulative asset under management for the four funds topping HK10 billion. The chart below demonstrates the collective asset growth of these funds from late August 2020 through January 2021.
Despite the Tech Index just being launched in July 2020, the Hong Kong Exchange has calculated and shared daily index data going back to the first day of 2015, with the index set at 3000 on the last day of 2014. This offers the opportunity to explore how the new index would have performed in the past on both an absolute and relative basis versus the Hang Seng index. The chart below indexes both the Hang Seng and Hang Seng Tech indices to 100 as of the last day of 2014 in order to demonstrate relative performance.
The outperformance of the Hang Seng Tech Index relative to the Hang Seng Index is pretty dramatic. Some of the recent outperformance of the Hang Seng Tech Index may be attributed to funds flowing into the newly created ETFs. However, it is worth noting that despite the current outperformance, there have been time periods where technology stocks have underperformed. This is very apparent noting the price action from late 2017 to late 2018 on the chart above.
Investment rewards are accompanied by higher volatility of returns and there is definitely more volatility associated with the price action of the Tech Index versus the Hang Seng. The figure below shows the 20 trading day realized volatility for each index. Note the line representing the Tech Index is consistently higher than the line representing realized volatility for the Hang Seng. The average spread, calculated by subtracting the Hang Seng Index realized volatility from that of the Hang Seng Tech Index just over 10% and this figure has risen to as much as 45% in the past.
In November 2020 the Hong Kong Exchange introduced futures contracts based on the Hang Seng Tech Index. Currently February, March, and June contracts are available for trading with the majority of activity in the front month. Open interest across all contracts recently topped 5,000, a solid figure for a newly listed derivative market.
Option traders are always looking for volatile markets to trade and as of Monday January 18 there are now listed options available on the Hang Seng Tech Index. These options have only been listed for three trading days, but we do have some insight into how they will be priced. Bloomberg calculates a consistent at-the-money 10-day implied volatility figure for any instrument that has an active option market. Over the first three trading days the average 10-day implied volatility for an at-the-money Hang Seng Tech Index option has averaged 34.08%. For comparison sake, the same figure for the Hang Seng Index has come in at 17.32%.
Finally, there have already been a couple of option trades of interest. On the first day of trading someone purchased the Hang Seng Tech Index Mar 30th 8200 Puts for 161 and sold the Mar 30th 8000 Puts for 122 resulting in a total cost of 39 points a spread. This trade was executed with the spot index around 9000, much lower than recent levels. On Wednesday, January 20, a trader sold 80 of the Feb 25th 9500 Puts for prices between 285 and 335. The Tech Index finished the day at about 9885.
The Hang Seng Index has always been a major benchmark that investors use to judge equity market performance in the APAC region. The Hang Seng Tech Index is quickly emerging as a benchmark for technology stock performance in the region, much like the Nasdaq-100 has always been considered a measure of technology stock performance in the U.S. The rapid success of the related exchange traded funds indicates that there is definitely an appetite for tech stock exposure. Finally, both the futures and options based on the Hang Seng Tech Index are seeing early interest that indicates this market will offer a multitude of opportunities to express bullish, bearish, and even a neutral outlook on tech stocks in the APAC region.