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BATs Bounce Back, Lift This ETF

ETF Professor

In the United States, there are the FANG stocks: Facebook Inc. (NASDAQ: FB), Amazon.com Inc. (NASDAQ: AMZN), Netflix, Inc. (NASDAQ: NFLX) and Google parent Alphabet Inc. (NASDAQ: GOOGL).

China has its own easy-to-remember acronym for fast-growing Internet-related fare: BATs for Baidu.com Inc. (NASDAQ: BIDU), Alibaba Group Holding Ltd. (NYSE: BABA) and Tencent Holdings (OTC: TCEHY).

What Happened

Last year, the BATs and their brethren stumbled, sending the KraneShares CSI China Internet ETF (NYSE: KWEB) lower by nearly 34 percent. As previously noted in this space, bad years for KWEB are often followed by rebounds. The China Internet ETF is obliging with a year-to-date gain of 13.68 percent.

There are some risks facing the BATs this year.

“Rising competition, M&A, trade tensions, and heightened regulatory risk are the main questions put to Fitch Ratings by credit investors in the Chinese internet majors,” said Fitch Ratings in a note out earlier this week.

Why It's Important

In order, Tencent, Alibaba and Baidu combine for 26.45 percent of KWEB's roster, according to KraneShares data. With a market value of $423.33 billion, Alibaba is about the same size as Facebook and almost triple the size of Netflix.

There are synergies between the BATs and other Chinese Internet companies. For instance, iQiyi Inc. (NASDAQ: IQ), often compared to Netflix, has partnership with Baidu.

“iQiyi also utilizes Baidu’s world-class artificial intelligence (AI) research to improve the efficiency of its operations,” notes KraneShares.

iQiyi, shares of which are up more than 30 percent in the U.S. this year, is KWEB's 12th-largest holding.

What's Next

“These companies (the BATs) are driving internet revolution beyond their core internet services to an era of artificial intelligence (AI) technology, amongst others,” said Fitch. “Fitch Ratings believes that M&A will remain opportunistic and regulatory risk will stay manageable. We consider the direct exposure of US tariffs to be minimal for these companies, though weaker consumer spending may indirectly dampen growth prospects.”

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