Tracker Fund of Hong Kong (2800), the city’s largest exchange-traded fund by assets, said on Monday it would not make any new investment in U.S. sanctioned entities, citing an executive order that prohibits Americans from investing in companies with Chinese military links.

The notice to unitholders released on Monday also reminds Americans that the unit trust is no longer appropriate for them to invest.

In response to Apple Daily’s queries, TraHK said the policy is subjected to change depending on future development and it will notify unitholders accordingly.

David Webb, an independent stock commentator, said the move is made as the manager and settlor of TraHK are Americans and the financial regulatory authorities have the power to replace them with non-Americans.

The unit trust is “designed to provide investment results that closely correspond to the performance of the Hang Seng Index,” said the notice. The manager seeks to achieve the objective by investing all, or substantially all, of TraHK’s assets in shares in the constituent companies of the Hang Seng Index in substantially the same weightings as they appear in the Hang Seng Index.

“When replication of the composition and weighting of the Hang Seng Index is impracticable, the manager, using its professional skill, care and judgement, will continue to strive to meet the investment objective to the best of its ability, taking into account all relevant market circumstances,” the notice continued.

The executive order affects many companies in the Hang Seng Index including China Mobile (941) and China National Offshore Oil Corporation (883). As a result, TraHK said it expects greater tracking error – the return of TraHK is likely to have a bigger deviation from the return of the Hang Seng Index.

“The manager will continue to assess the impact of the situation and will closely monitor any follow-up developments,” it added.

The manager of TraHK is State Street Global Advisors Asia Limited, an American company that is required to oblige by the executive order.

Pun Tit-shan, vice chairperson of the Institute of Financial Analyst and Professional Commentator, said the unit trust may increase the weighting of other companies in the Hang Seng Index in the future, to avoid falling behind the Index. He also predicted the Hang Seng Index will rise as mass vaccinations begin around the world.

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