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Short-Term Pressure Ahead for China Tech ETFs?

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It seems worries have decided not to spare the global tech space this year. The area has been hit hard by one-after-another threat. The issue started with Facebook’s (FB - Free Report) data breaches in March and the consequent concerns about stringent regulations over the social media space (read: 5 Reason Why FANG ETFs Lost Their Charm in March).

The situation worsened with a massacre following Nvidia’s self-driving car tests and an acute selloff in Netflix. Then tiff between the United States and China related to import tariffs did its share of damage to the sector. In fact, Lenovo Group Ltd. dropped to its lowest level since 2009 lately thanks to a U.S. ban on China’s mobile phone maker ZTE Corp., which hurt sentiments toward that country’s technology sector.

ZTE Corp. said on Apr 20 that a U.S. ban on selling parts and software to the company was unjustified and may be a threat to its existence. Last week, the U.S. Commerce Department’s Bureau of Industry and Security barred American companies from selling to ZTE for seven years.

Washington noted that the Chinese company had “broken a settlement agreement with repeated false statements” and slammed the ban “in a case involving exports of telecoms equipment to Iran and North Korea.”

The company may continue using Android, paying no fee to Google, but “might lose access to applications such as Google Maps, Gmail and YouTube,” per an IDC analyst. ZTE was ready to pay a $1.19 billion penalty for shipping equipment to Iran and North Korea in violation of U.S. regulations.

This news triggered a selloff in ZTE’s rival companies like Huawei Technology and Lenovo Group. Moreover, Taiwan Semiconductor Manufacturing Co Ltd (TSM - Free Report) dealt a blow to the tech industry on Apr 19 after the company reported Q1 results before market open and pointed to a decline in smartphone demand.

The company’s revenue forecast target for the second quarter came in the range of $7.8 billion to $7.9 billion, falling shy of analysts’ expectation of $8.8 billion. International Monetary Fund (IMF) too said that current smartphone-driven tech cycle probably topped in late 2015 and even noted that China’s domestic smartphone market shrunk for the first time in 2017.

China Tech ETFs Under Pressure?

Guggenheim China Technology ETF (CQQQ) lost about 2.3% on Apr 20, Global X NASDAQ China Technology ETF (QQQC - Free Report) was down about 1.6% (read: Forget Tech Woes: Buy These Cybersecurity Stocks & ETFs).

CQQQ in Focus

Lenovo and ZTE Corp occupy about 2.13% and 1.65% of the fund, respectively. The fund holds about 75 stocks and chargers about 70 bps in fees.

QQQC in Focus

Lenovo Group takes about 3.97% of the 48-holding fund while ZTE CORP-H occupies about 1.86% of the basket. The fund charges 65 bps in fees (see all Technology ETFs here).

Bottom Line

However, overall fundamentals are decent and the funds have a favorable Zacks Rank. So, investors with a strong stomach for risks can target this dip as a buying point.

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