Buy on the Dip With China Internet ETFs?

ETF Trends

China technology-related exchange traded funds are finally pulling back after outpacing the broader markets. Some investors may see this as a good point of entry to capitalize on the maturing tech industry in China.

The KraneShares CSI China Internet Fund (KWEB) is down 15.4% since its March 6 high. Nevertheless, KWEB is still up 3.3% year-to-date, outperforming broader china-related ETFs, like the iShares China Large-Cap ETF (FXI) , which dropped 8.5% so far this year. [Getting Involved With the High-Flying China Internet ETF]

The pullback in Chinese tech stocks may be temporary. Morgan Stanley analysts Philip Wan, Timothy Chan and Amanda Chen argue that Chinese tech stocks are not in a Dot-Com bubble as many companies are generating revenue, reports Shuli Ren for Barron’s.

“Unlike some of the start-ups that went public during 1998-2000 with concepts but lacking proven business models, most listed Chinese Internet companies generate solid revenue streams,” the Morgan Stanley analysts said. “In addition, ‘maturing’ PC online businesses (such as paid search, advertising and client-based gaming) are profitable and cash generative, which can subsidize the investments for new businesses.”

The analysts argue that investors should be buying on the dip. For instance, Morgan Stanley points to Tencent as it is “asset-light” and is forming strategic relationships with other companies, like JD.com.

Moreover, the money manager identified defensive businesses with healthy earnings expansions from YY (YY) and New Oriental (EDU).

Baidu (BIDU) and Ctrip (CTRP) show expanding top-line growth, the analysts added.

The KraneShares CSI China Internet ETF holdings include Tencent 10.2%, Baidu 7.2%, CTrip 6.4% and YY 3.7%.

Other China tech sector-specific ETFs include the Guggenheim China Technology ETF (CQQQ) and Global X NASDAQ China Technology ETF (QQQC) . Since the March 6 high, CQQQ is down 11.5% and QQQC declined 10.6%. Year-to-date, CQQQ dipped 1.3% and CQQQ fell 3.0%.

KraneShares CSI China Internet Fund

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For more information on China, visit our China category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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