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Tap into China's Technology Potential with These ETFs

Zacks Equity Research

The China technology sector has seen massive development over the past few years. The country currently has over 630 million Internet and mobile Internet users from just 94 million over a decade ago -- the biggest number of ‘netizens’ in any country.
Still, Internet penetration in China is just 47% as compared to 87% in the U.S. There are roughly 450 million people living in rural areas who are yet to have Internet services, implying that the China Internet space is younger, has ample pent-up demand and more room to grow.  China Internet companies have the opportunity to tap this vast population, which if done correctly, can provide tremendous returns to investors.
The space added 14.4 million new Internet users in the first half of 2014, according to the China Internet Network Information Centre (:CNNIC). Mobile phone users represent the majority of online users as compared to PCs (read: China Internet ETF: The Best Choice in the Space?).
Quite notably, the IT giant Tencent (famous for its instant messaging (IM) service – WeChat), has penetrated into almost every sector related to the Internet and Technology, including online games, mobile applications, software development, websites, Internet finance, blogs, and videos.
The Hot Sector
The major share of China’s tech revolution is expected to come from a booming e-commerce industry. Last year, China surpassed the U.S. to become the world's largest online market, as per Australia and New Zealand Banking Group (:ANZ). 
Market researcher McKinsey & Company estimates that by 2020 China’s e-retailing market will be on par with the combined U.S., Japan, the UK, Germany, and France markets at present.
Currently, the Chinese e-commerce market is dominated by its homegrown Internet giant Alibaba Group (owns Taobao and Tmall), which ranks No. 1 in the Internet Retailer Asia 500 rankings.
The upcoming listing of Alibaba in the New York stock exchange symbolizes the tremendous potential of Chinese tech companies. This is expected to provide a great lift to other Chinese tech companies to make public offerings in the U.S.
Also, shares of Tencent and China’s main search engine Baidu trade at lower multiples than those of Facebook, Google and other American Internet companies and hence appear quite attractive on the valuation front (read: Guide to China Technology ETFs).
Moreover, lurking concerns about a China slowdown have been dispelled with the economy clocking faster-than-expected growth last quarter. A recovering economy with increasing disposable income is expected to provide a boost to smartphone sales (which slumped during the first quarter), which in turn is expected to be beneficial for Internet growth.
3 ETF Picks
Given the solid fundamentals and attractive stock valuation, betting on the China Internet space is expected to boost investors' overall portfolio return. To add to it, the sentiment toward China is slowly turning positive.  With a supportive government inclined to clear bottlenecks and infuse the economy with further growth, the space might see strong returns going forward (see all Technology ETFs here).
For investors keen on buying the China growth story, we have highlighted below three ETF picks. These ETFs have a decent Zacks Rank (#3 or Hold) and are expected to perform well going forward should the China tech boom continue:
Guggenheim China Technology ETF (CQQQ)
Launched in December 2009, the fund manages an asset base of $75.7 million, charging investors 70 basis points a year as fees. The top 10 stocks make up more 50% of the 64 stock portfolio, suggesting some concentration risk.
Tencent (10.56%) Baidu (10.1%) and Lenovo (8.4%) occupy the top three positions. The ETF offers a dividend yield of 0.76% and has returned a stellar 38% in the past one year.
Global X NASDAQ China Technology ETF (QQQC)
The fund tracks the NASDAQ OMX China Technology Index to provide exposure to a basket of 36 stocks. Baidu, Lenovo and Tencent together occupy one-fourth of total fund assets.
The fund manages an AUM size of $22 million and charges 65 basis points as fees. As far as performance is concerned, the fund has returned 37% in the past one year and 9% in the year-to-date frame (see China ETF Investing 101).  

CSI China Internet ETF (KWEB)
Launched last year, KWEB has gained quite a lot of popularity and currently manages an AUM of $78.7 million.  The fund trades in moderate volume of roughly 45,000 shares a day.
Tencent occupies the top spot with 10.2% allocation, followed by Baidu (9.7%) and JD. Com (7.4%). The fund charges 68 basis points as fees and has added 15% so far this year.
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