FXI iShares China Large Cap

After witnessing 30 years of stellar economic growth, the Chinese economy has been going through a choppy phase for quite some time now. If we ignore some occasional upbeat data from the last 1.5 years, one has to question the health of the world’s second largest economy.

The nation saw weakened growth for 2013 to hit 14-year lows. China snapped a growth rate of 7.7%, which came a little above the market expectation of 7.6% expansion. Notably, analysts’ expectations for growth were the slowest since 1999.

For 2014, the Chinese government has targeted 7.5% growth rate, though this muted growth projection comes at the cost of new reforms in China, as per the government, while recent export figures haven’t helped either (read: China ETFs Tumble to Start 2014). 

Quite expectedly, this near-term gloomy outlook has punished most of the China ETFs this year, as the vast majority are seeing modest losses to start 2014. However, only one sector -- technology – has held up pretty well in this downslide, with Guggenheim China Technology ETF (CQQQ) and Global X China Technology ETF (QQQC) returning just under 10.0%.

And beyond these, the China Internet ETF CSI China Internet ETF (KWEB) has also edged past the other two tech ETFs gaining as much as 21% this year. This is why the space demands close attention, especially given the broad weakness in other corners of the Chinese market.

What’s Behind This Bullishness?

China is possibly the most important emerging market and has ample room for expansion in the technology sector that will support its journey toward becoming a developed nation. Internet penetration is still low in China though people are embracing e-commerce activities and PC sales are increasing, thus urging the nation to go for further technological advancements.

China recorded 618 million Internet users to close out 2013 and 500 million mobile Internet users. The Internet penetration rate in China also increased to 45.8% in 2013 from 42.1% in 2012. To leverage this growing demand in the sector, China aims its technology sector to contribute 5% of GDP now, 8% in 2015 and 15% by 2020.

Several market analysts believe that market capitalizations of Chinese Internet companies are contesting hard with the largest U.S. and global industry players (read: Guide to China Technology ETFs).

 KWEB in Focus

This ETF is a rather new member in the China ETF space, having forayed into the market on July 31 of 2013 and accumulated more than $75.0 million in assets within such a short span. The ETF is exposed to the companies doing business in the segments like Internet software, home entertainment and educational software, commercial or retail services primarily provided online, and development of mobile Internet software or mobile Internet services.

All companies are based in China or derive at least 50% of their revenues from Mainland China. About 60% of the 30-holdings portfolio is invested in the top 10 stocks indicating that the ETF carries significant company-specific concentration risk.

Tencent (10.2%), QIHOO 360 (8.8%) and Baidu (7.0%) form the top three holdings. KWEB charges 68% of expense ratio a year (read: KraneShares Launches China Internet ETF).

During the launch of this ETF, the issuer noted that since 2000, Internet spending by urban Chinese has crept up 14% annually as the country’s rural populace is still migrating to cities thereby drawing more users to the Internet.



Bottom Line

From the chart above, we can see that the Chinese Internet ETF has breezed past the biggest China ETF iShares FTSE China 25 Index Fund (FXI), as well as the iShares MSCI China Index Fund (MCHI) and SPDR S&P China ETF (GXC) over the last three-month period.

While all three broad market ETFs buckled under pressure and lost for the time frame, the sole Internet-focused ETF, KWEB, soared in comparison. No ‘hard landing’, no “QE taper”, no “debt issues” held back the steadily growing Internet segment as well as the broader tech space of China.

Of late, China has become a turning point (to a large extent) with its domestic events either promoting stability to the broader economy, or pushing other markets into a crisis situation. While we believe that long-term outlook for the nation is still optimistic as its government resorted to a slew of reformative measures, many investors seemed wary of having a Chinese investment in their portfolio in the near term.

Eventually, KWEB might open up an option to earn huge capital appreciation out of Chinese stocks, and a way to tap into one of the quickest growing sectors in the economic behemoth (read: China ETFs Jump on Government Reform Afterglow).

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GUGG-CHINA TEC (CQQQ): ETF Research Reports
 
ISHARS-CHINA LC (FXI): ETF Research Reports
 
KRANS-C CHN INT (KWEB): ETF Research Reports
 
GLBL-X NDQ CHIN (QQQC): ETF Research Reports
 
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