Is This The Best Way To Play China?

Chinese stocks have gotten rocked recently due to Covid shutdowns in the region. However, we know it won’t last forever. Some investors see the dip as a buying opportunity. 

In fact, TrackStar data shows an unusual spike in search activity in KraneShares CSI China Internet ETF (KWEB), an ETF focused on Chinese internet stocks. The ETF’s search volume is outpacing individual stocks Lowe’s, Pfizer, and Pepsi. But is this just speculative trading, or is there an investment to be made? We dig in to find out. 

KraneShares CSI China Internet ETF (KWEB) 

KraneShares CSI China Internet ETF (KWEB) tracks the CSI Overseas China Internet Index, consisting of Chinese internet and internet-related technology companies. It allows investors to access a diverse batch of Chinese internet companies listed in the United States and Hong Kong. 

Key Facts About KWEB

• Net Assets $3.94 billion
• Yield 0.44%
• Beta 0.45 (3-YR Avg.)
• Std. Deviation 33.81% (3-YR Avg.)
• Price/Book 4.29x

There are 42 stocks in the KWEB portfolio. The top ten holdings make up more than 62% of its weight. 

Source: KraneShares

As you can see above, the top holdings consist of large-cap Chinese companies like Alibaba, Tencent, and JD.com. 

Performance

KWEB began trading in 2013 and, since its inception, delivered a cumulative return of 30.74%. However, its performance over the last three years has been poor, delivering an average annualized return of -13%. Moreover, it’s had an average annualized return of -10.86% in the last five years.

Fees

KWEB charges a total annual fund operating expense of 0.69%. 

Trading & Investing In KWEB

KWEB is actively traded, with daily volume averaging approximately 22.7 million shares. Options trading is available for traders interested in playing KWEB. It also pays a dividend of $0.13 annually, a yield of 0.43%. 

Competition

If you’re an investor who wants exposure to Chinese large-cap stocks, KWEB is not your only option. Other alternatives include SPDR S&P China ETF (GXC), iShares China Large-Cap ETF (FXI), iShares MSCI China ETF (MCHI), and Invesco China Technology ETF (CQQQ). 

Portfolio Composition

KWEB Chinese Large-Cap Growth (Internet Related)

GXC Chinese Large-Cap Blend (Diversified)

FXI Chinese Large-Cap Value (Diversified) 

MCHI Chinese Large-Cap Blend (Diversified)

CQQQ Chinese Large-Cap Growth (Technology Related)

If growth is what you desire, KWEB and CQQQ offer the best options. 

If you’re more conservative, FXI focuses on value, while GXC and MCHI deliver a blend. 

Fees

KWEB 0.69%

GXC 0.59%

FXI 0.74% 

MCHI 0.57%

CQQQ 0.70%

The cheapest fund charges an expense ratio of 0.57%, which is the MSCI China ETF (MCHI). 

In contrast, iShares China Large-Cap ETF (FXI) is the most expensive. Ideally, the smaller the fee, the better it is for the investor. 

However, if one fund grossly overperforms, then that will trump the cost you pay to the fund.  

Performance- Last Five Years (Cummulative Returns)

KWEB -37.97%

GXC -17.91%

FXI -30.97% 

MCHI -19.95% 

CQQQ -26.5% 

The last five years have been brutal for Chinese ETF investors. The worst-performing fund has been KWEB at -37.97%, and the fund that’s lost the least amount is GXC at -17.9%.  

However, many financial pros have begun to show interest in Chinese names as the country’s Covid and economic policies evolve.

Dividends

KWEB 0.43%

GXC 2.07%

FXI 2.01% 

MCHI 1.26% 

CQQQ 0.46% 

GXC and FXI payout similar dividends, yielding approximately 2%. While KWEB and CQQQ focus more on growth companies, pay the lowest at 0.43% and 0.46%. 

Our Opinion 4/10

Shares of KWEB are down 16.8% YTD, which isn’t awful considering how the overall market has performed in 2022. 

However, there’s too much uncertainty around China, from COVID restrictions to a potential trade war with the U.S. 

The fund’s performance over the last five years has been awful, and while we believe in diversification, we’re reluctant to buy KWEB. 

We think GXC and MCHI offer better alternatives if you want exposure to Chinese stocks.