Be Wary of Hong Kong ETF

NEW YORK (TheStreet) -- As doubts continue to swirl around Europe and the U.S., other corners of the globe have had the chance to rise to the occasion, threatening to upend the long standing dominance of these economic leaders.

The World Economic Forum announced this week that Hong Kong had surpassed both the U.S. and UK to score the top spot on the group's Financial Development Index. The WEF's rankings were based on a number of factors, including financial access, stability, efficiency, and size. Previously, the Chinese city-state held the fourth place spot.

As many have noted, this is a landmark event. Never before has an Asian nation taken this crown. In fact as CNN reports, this is the first time in the ranking's history that neither the U.S. nor the UK topped the 60-country index. In the 2011 list, the two sit at second and third place, respectively.

With nearly 60% of its portfolio dedicated to financials, it is understandable that investors may be immediately drawn to the iShares MSCI Hong Kong Index Fund ( EWH) given this impressive news. Looking ahead, however, I urge investors to use extreme caution here.

Strong scores on non-banking services such as IPOs and insurance have largely been attributed to Hong Kong's impressive ascension. While the strength and stability of these components are encouraging, the nation's extensive real estate industry is a glaring point of concern.

For years, China's lawmakers and property developers have been butting heads leading investors, analysts, and market commentators to question the future prospects for the Chinese real estate industry. Fearing a property bubble, the nation's government has taken a number of steps in hopes of stifling the seemingly unstoppable rise in housing prices. While in the past, few results have come from these efforts, increasingly, the tide appears to be shifting.

In November, housing prices fell to their lowest levels in six months. The decline, however, does not appear to be over. Rather, this week, in a report from Bloomberg, officials at Standard Chartered predicted that housing prices could fall by as much as 10% in 2012 before seeing signs of a rebound.

With the government's plan showing signs of fruition, it will be interesting to see how it reacts in the coming months. Preventing this sought-after downturn from transforming into a steep, prolonged crash will likely become a key goal in the new year.

As the nation's government constructs and prepares to execute the next step in its plan, property developers could be in for some rocky action. This, in turn, could heavily impact the performance of the Hong Kong ETF. Many top real estate players from this region, such as Sun Hung Kai Properties, Hutchison Whampoa, and Cheung Kong Holdings, can be found representing respectable slices of EWH's extensive financials portfolio.

The economic trials facing the Western world have tested the patience of even the most confident investor, and opened doors for growing nations to rise to dominance. News that Hong Kong had officially surpassed the U.S. and UK to top the WEF's index is exciting and encouraging. However, investors should continue to use discretion when venturing into this corner of the globe.

Written by Don Dion in Williamstown, Mass.

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At the time of publication, Dion Money Management did not own any equities mentioned.

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