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What Lies Ahead for China Tech ETFs?

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Tech Sector Performance


Global Tech stocks have attracted investors’ attention this year for their impressive performance. Although U.S. tech stocks have fared well, their Chinese counterparts performed better.


Although recent geopolitical risks have been a drag on U.S. tech stocks, U.S. tech sector of the S&P 500 has surged 22.6% so far this year and remains the best performer. However, MSCI China Information Technology Index has gained 62.8% so far this 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.


Where Does the Chinese Economy Stand?


China’s GDP increased 6.9% year over year in the second quarter of 2017, flat quarter-over-quarter. China reported a strong first half of 2017 but recent data showed signs of fading GDP. Although high credit growth has supported GDP, it has increased financial risks, per the S&P.


In a latest development, S&P Global ratings downgraded China’s sovereign rating by a notch to A+ from AA- and revised its outlook to stable from negative. This was the second such rating cut in 2017 by a major institution, as Moody’s had cut China’s credit rating to A1 from Aa3 earlier this year.


China is also subject to geopolitical risks as Asian markets suffer from massive volatility due to North Korea’s actions. "Since the U.S. declared war on our country, we will have every right to make countermeasures, including the right to shoot down the U.S. bombers even when they are not yet inside the airspace border of our country," North Korean foreign minister Ri Yong Ho said in response to Trump’s comments of destroying North Korea (read: Beyond North Korea, 4 More Reasons to Buy Defense ETFs).


In addition to the UN sanctions on North Korea passed on Sep 11, the United States has imposed harsh fresh financial sanctions on North Korea on Sep 21. Per Reuters, People's Bank of China informed Chinese banks to adhere to UN sanctions against North Korea and stop business with Pyongyang. Owing to the fact that 90% of North Korea’s trade is with China, these sanctions are expected to greatly impact China (read: Safe Haven Currency ETFs Gain Amid Latest North Korea Threats).


Current Scenario in the Chinese Tech Sector


The giants in China’s internet space, Alibaba and Tencent have reported strong quarterly results. However, most recently, the Cyberspace Administration of China handed down penalties to the giants in the Chinese internet market. Tencent, Baidu and Weibo face penalties for not screening content appropriately. This has led to a decline in Chinese tech stocks, including Alibaba, which has a stake in Weibo.


The government has played a major role in the impressive performance of these stocks. Intense competition from the U.S. has been restricted, as huge internet giants like Facebook, Google, Twitter, Instagram and the likes have been banned in China. Being the largest internet market in the world, this relatively closed sector has helped domestic giants in terms of not having to worry about international competition.


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 $1.07 billion 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 Sep 25, 2017). Tencent Holdings Ltd, Alibaba Group Holding-SP and Baidu Inc Spon ADR are the top three holdings of this fund, with 11.1%, 10.0% and 9.0% exposure, respectively (as of Sep 25, 2017). The fund has returned 58.7% year to date and 34.7% in a year (as of Sep 25, 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 $273.3 million and charges a fee of 70 basis points a year. Tencent Holdings Ltd, Alibaba Group Holding-SP and Sunny Optical Tech are the top three holdings of this fund, with 11.9%, 11.2% and 7.9% exposure, respectively (as of Sep 25, 2017). The fund has returned 55.4% year to date and 35.3% in a year (as of Sep 25, 2017). It currently has a Zacks ETF Rank #2 (Buy) with a High risk outlook.


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