Buy This ETF to Bet on a Rebound in Already Battered Chinese Tech Stocks

China’s economy is slowing down, with GDP growth in the second quarter of 2024 reaching 4.7%, below expectations and slower than the previous quarter. In response, the People’s Bank of China (PBOC) took a surprise step on July 22, cutting interest rates to stimulate the economy. The PBOC lowered its seven-day reverse repo rate by 10 basis points to 1.7%, and cut the one-year and five-year loan prime rates (LPRs) to 3.35% and 3.85%, respectively.

The move is likely to have a domino effect across multiple sectors, with tech being the biggest potential winner. Chinese tech stocks have struggled amid regulatory crackdowns and an economic slowdown, but increased liquidity and stimulus could provide a much-needed boost. The sector still trades at a steep discount to its U.S. counterpart and historical levels, making it an attractive opportunity for investors willing to embrace heightened geopolitical risks.

That’s where the KraneShares CSI China Internet ETF (KWEB) comes in. The ETF offers a unique opportunity to invest in a potential Chinese tech rebound with a portfolio that includes some of the country’s biggest tech heavyweights. With Beijing’s recent moves to revitalize its key growth industries, KWEB is well-positioned to capitalize on any tech resurgence.

Rate cuts and technology stocks

What does monetary policy easing mean for Chinese tech stocks? A lot, potentially. These rate cuts are like fuel for the economy, making borrowing cheaper and encouraging increased spending and investment. For tech companies, that could mean more capital for research and development, expansion plans, and even mergers and acquisitions.

But it’s not just about research and development, or even mergers and acquisitions. When interest rates fall, investors often seek higher returns through growth-oriented stocks. While the same tech stocks that seemed too risky yesterday start to look a lot more attractive today, the overall impact of increased investment in the sector can drive stock prices higher.

Moreover, lower interest rates tend to boost consumer spending. In a country where e-commerce is king and mobile payments are ubiquitous, increased consumer activity directly benefits many tech companies. Imagine waves of additional consumers shopping on Alibaba (BABA) or JD.com (JD), or using services like Meituan for food delivery.

Beijing knows that technology is a key driver of growth. Earlier this year, the PBOC set up a $69 billion loan program specifically for tech companies. The initiative aims to provide low-cost loans to tech companies, helping them innovate and grow.

As these funds begin to flow into the sector, it could be a game-changer for the Chinese internet companies tracked by KWEB – and the possibility of similar initiatives by the PBOC to help tech companies access cheaper capital could also support growth.

Presentation of KWEB

The KraneShares CSI China Internet ETF (KWEB) offers investors a unique opportunity to tap into the Chinese internet sector. It has an impressive $4.80 billion in assets under management, highlighting its size and popularity among investors seeking exposure to the Chinese tech investment landscape. With an average volume of over 16 million shares, KWEB is highly liquid and also has an active options market.

KWEB is down 12.3% over the past 52 weeks, and the exchange-traded fund (ETF) has lost nearly half that over the past three years. Since hitting its 52-week low in January, KWEB is up about 17%, but shares are also down 19% from their May highs year-to-date. All told, that’s a year-to-date return of about 2%. In other words, owning KWEB stock isn’t necessarily for the faint of heart.

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KWEB’s strategy is simple but effective: it tracks the CSI Overseas China Internet Index, focusing on Chinese companies in the Internet and related sectors. This approach allows investors to gain exposure to the US- and Hong Kong-listed stocks of Chinese Internet giants, providing a diversified yet concentrated portfolio.

Speaking of portfolios, KWEB’s top holdings include some of the biggest names in Chinese tech. Tencent Holdings (TCEHY) leads the way with 10.22%, followed by Alibaba Group (BABA) with 9.72%. Other major players in the mix are Temu’s parent company PDD Holdings (PDD) with 8.06%, Meituan with 7.30%, and JD.com (JD) with 5.64%. The list continues with NetEase (NTES) with 4.55%, Tencent Music Entertainment Group (TME) with 4.41%, Baidu (BIDU) with 4.01%, Trip.com Group (TCOM) with 3.90%, and KE Holdings (BEKE) with 3.84%. These top 10 holdings account for over 61% of the fund’s total assets, indicating a concentrated bet on the industry’s biggest players.

For income-seeking investors, KWEB offers an annual dividend. The most recent payment was $0.46 per share, which translates to a dividend yield of approximately 1.67%. While not a high-yield investment, this dividend adds a welcome income component to this growth-oriented ETF.

Of course, these benefits come at a cost. KWEB’s expense ratio is 0.69%, which, while not the lowest, is reasonable given the specialized exposure it offers to China’s tech sector.

KWEB’s strategy of providing exposure to stocks of Chinese internet companies listed in both the US and Hong Kong is particularly noteworthy. This dual-listing approach provides flexibility and potentially reduces risk, allowing the fund to more effectively address regulatory challenges and market fluctuations.

Is KWEB a Good Bet on Chinese Tech Stocks?

In summary, the KraneShares CSI China Internet ETF (KWEB) offers an attractive opportunity for investors looking to capitalize on a potential rally in Chinese tech stocks. With significant assets under management, a strategic focus on leading Chinese internet companies, and potential tailwinds from the PBOC’s recent monetary easing, KWEB is well-positioned to benefit from any positive market developments. That said, traders should be aware of the geopolitical risks specific to this sector and proceed cautiously accordingly.

As of the date of publication, Ebube Jones did not hold (either directly or indirectly) any positions in any of the securities mentioned in this article. All information and data contained in this article are provided for informational purposes only. For more information, please see Barchart’s disclosure policy here.

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