Here's Why China Tech ETFs Are Surging

Global Tech stocks have been in the spotlight this year. Although U.S. tech stocks have performed strongly, their Chinese counterparts were better performers.

U.S. tech sector of the S&P 500 has surged 17.15% in the first seven months of 2017 and remains the best performer. However, MSCI China Information Technology Index has gained more than 56% in the first seven months of the year in terms of the Chinese yuan. The stark difference is indicative of investors’ growing preference and inclination toward tech stocks of the world’s second largest economy.

China’s GDP has been growing at a fast pace. It increased 6.9% year over year in the second quarter of 2017, in line with the first quarter. Although, industrial production grew 6.4% year over year in July compared with 7.6% in June, manufacturing Purchasing Managers’ Index (PMI) increased to 51.1 from 50.4 in June 2017. Therefore, despite the slowdown, China seems to be on track to achieve its 6.5% growth target for 2017 (read: China Economic Data Disappoints: ETFs in Focus).

Online shopping constitutes a lot bigger share of total shopping revenue pie in China compared to the U.S. Per a CNBC article, online sales constituted 13.8% of total retail sales in China in the first half of 2017 compared with 11.6% in the year-ago period. On the other hand, U.S. online sales constituted 8.5% of total retail sales in the first half of 2017.

The giants in China’s internet space, Alibaba and Tencent have reported strong quarterly results. Alibaba registered revenues of $7.4 billion in the June quarter, a 53% increase annually. It reported an EPS of $0.94, surpassing the Zacks Consensus Estimate of $0.73 and up 80% annually. Tencent Holdings registered revenues of $8.4 billion in the June quarter, a 59% increase annually. It reported an EPS of $0.25, surpassing the Zacks Consensus Estimate of $0.23.

Although the performance of these Chinese companies for sure has been impressive, the government’s role too cannot be ignored. Intense competition from the U.S. has been restricted as huge internet giants like Facebook (NASDAQ:FB), Google (NASDAQ:GOOGL), Twitter, Instagram and the likes have been banned in China.

The Chinese economy is also subject to the prevailing geopolitical risks relating to recent missile tests by North Korea. However, the North Korean economy is heavily dependent on trade with China and it will be interesting to see how President Xi-Jinping handles the situation. This is primarily because President Donald Trump’s Chinese counterpart has not shown much interest so far in using its upper hand over North Korea to tackle the situation (read: ETFs to Profit from US-North Korea Tensions).

Let us now discuss a few ETFs focused on providing exposure to the Chinese economy (see all Asia-Pacific Emerging ETFs here).

KraneShares CSI China Internet ETF KWEB

This fund seeks to provide exposure to Chinese companies with a primary business in internet-related sectors.

It has AUM of $748.07 million and charges a fee of 72 basis points a year. From a sector look, Technology, Consumer Discretionary and Industrials are the three allocations of the fund, with 60%, 37.6% and 2.4% exposure, respectively (as of August 18, 2017). Tencent Holdings Ltd (OTC:TCEHY) , Alibaba Group Holding-SP (NYSE:BABA) and Baidu Inc Spon ADR (NASDAQ:BIDU) are the top three holdings of this fund, with 10.9%, 10.07% and 8.58% exposure, respectively (as of August 18, 2017). The fund has returned 56.87% year to date and 42.38% in the last one year (as of August 18, 2017). It currently has a Zacks ETF Rank #3 (Hold) with a High risk outlook.

Guggenheim China Technology ETF CQQQ

This fund seeks to provide exposure to Chinese companies with a primary business in technology sectors.

It has AUM of $160.67 million and charges a fee of 70 basis points a year. Tencent Holdings Ltd, Alibaba Group Holding-SP and Sunny Optical Tech (OTC:SNPTF) are the top three holdings of this fund, with 11.86%, 11.57% and 7.14% exposure, respectively (as of August 18, 2017). The fund has returned 48.44% year to date and 37.41% in the last one year (as of August 18, 2017). It currently has a Zacks ETF Rank #2 (Buy) with a High risk outlook.

Below is a chart comparing the year to date performance of the two funds.

Source: Yahoo (NASDAQ:AABA) Finance

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