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ETF News And Commentary

KraneShares, fresh off the launch of its first ETF, isn’t wasting any time in putting out more China-centric products on to the market. The company is continuing with its niche strategy, following up the launch of its CSI Five Year Plan ETF (KFYP - ETF report) with the CSI China Internet ETF (KWEB - ETF report).

This new ETF, which charges investors 68 basis points a year in fees, looks to give investors concentrated exposure to firms focused on the Chinese internet market (also read China ETF investing 101). For those intrigued by this new way to look at Chinese stocks, we have highlighted some of the key details regarding the product below:

KWEB in Focus

This new ETF looks to track the CSI Overseas China Internet Index, which is designed to measure the performance of publicly traded China-based companies whose primary business are in the internet and internet-related sectors. The index provider considers these businesses to be internet software, home entertainment and educational software, commercial or retail services provided primarily through the internet, and development of mobile internet software or mobile internet services.

Additionally, investors should be aware of how the index provider defines a ‘China-based company’. For their purposes this includes firms that are incorporated or headquartered in Mainland China, or those that derive at least 50% of their revenues from Mainland China. The resulting portfolio consists of about 25 stocks, though the portfolio looks to remain between 20-30 securities at all times (also read 3 Overlooked Emerging Market ETFs).

Current top holdings for this ETF include Baidu.com (10.4%), Tencent (9.5%), and QIHO 360 Technology (7.7%). Roughly half the portfolio is in the top ten securities, so there definitely is some concentration risk, especially considering that all of the companies in the ETF are in pretty much the same sector.

“KraneShares CSI China Internet ETF provides US investors with an opportunity to gain exposure to China's growing internet sector with the cost efficiencies of ETF investing," said Brendan Ahern, Managing Director of KraneShares in a press release. "We see two powerful demographic trends driving China's internet sector: since 2000, internet spending by urban Chinese has increased 14% annually, and China's rural population continues to migrate to urban areas, further fueling internet usage."

How does it fit in a portfolio?

This ETF could be appropriate for investors seeking a new way to play China that has tilt towards one of the most important and fastest growing segments in the enormous country. The fund could also be a nice complement to a portfolio that is heavy in other China products that have minimal technology allocations, helping to round out exposure to the space (see Inside the Surging China Technology ETFs).

Arguably, the fund shouldn’t be a core holding in a portfolio though, as it is far too concentrated in a volatile sector of an emerging market. It should also be noted that trading volumes—and bid ask spreads—may not be favorable (at least initially) so it may be difficult to quickly trade in and out at a good price.

ETF Competition

While there aren’t any other products on the market that have such a concentrated focus on the China internet segment, there are a handful of Chinese technology ETFs that could be competitors. These include the Guggenheim China Technology ETF (CQQQ - ETF report) and the Global X NASDAQ China Technology ETF (QQQC - ETF report).

Both of these funds remain relatively unpopular with investors though, despite having been on the market for almost four years now. In fact, the two combine to possess less than $40 million in assets under management, suggesting that many investors haven’t embraced this method for their China exposure.

This is despite the fact that both QQQC and CQQQ have been pretty solid performers over the past year, easily beating out some of their more famous peers. Both the products have actually added about 27% YTD compared to a double digit loss for the ultra popular (FXI - ETF report) in the same time frame (see The Right and Wrong Ways to Invest in China ETFs).

Bottom Line

Given how unpopular the other China technology ETFs are, it may be difficult for this newcomer to accumulate assets in this often overlooked space. Investors haven’t paid much attention to China technology companies, even with their incredible performances lately.

However, KWEB may offer up a slightly more concentrated look at the quickly-growing internet segment, as opposed to just the broad technology world that investors gain exposure to in the other funds. Whether this is enough to push the KraneShares ETF up to a solid asset level remains to be seen, though it will certainly be interesting to see how this fund does in the increasingly competitive China ETF market.

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