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

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

The move is expected to have a knock-on effect across sectors, with technology potentially being a big winner. Chinese tech stocks have been struggling due to regulatory crackdowns and an economic slowdown, but increased liquidity and stimulus measures could give them a much-needed boost. The sector continues to trade at a large discount to its U.S. counterparts and to historical levels, making it an intriguing opportunity for investors willing to accept increased geopolitical risk.

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

Interest rate cuts and tech stocks

What does looser monetary policy mean for Chinese tech stocks? Potentially quite a bit. Those rate cuts are like rocket fuel for the economy, making borrowing cheaper and encouraging more spending and investment. For tech companies, that could mean more capital for research and development, expansion plans, even mergers and acquisitions.

But it’s not just about R&D or even M&A. When interest rates fall, investors often seek higher returns through growth-driven stocks. As the same tech stocks that seemed too risky yesterday start to look much more attractive today, the overall impact of increased investment in the sector could boost stock prices.

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

And Beijing knows that technology is a key driver of growth. Earlier this year, the PBOC launched a $69 billion re-lending program specifically aimed at tech companies. The initiative aims to provide cheap loans to tech companies, helping them innovate and grow.

Once that money starts flowing through the sector, it could be a game-changer for Chinese internet companies tracked by KWEB. Similar initiatives by the PBOC to help tech companies get cheaper capital could also help boost growth.

KWEB Review

KraneShares CSI China Internet ETF (KWEB) offers investors a unique opportunity to take advantage of China’s internet sector. It has an impressive $4.80 billion in assets under management, underlining its size and popularity among investors seeking exposure to China’s technology 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 ETF has lost nearly half of its value over the past three years. Since setting a 52-week low in January, KWEB has gained about 17%, but the stock has also retreated 19% from its May YTD highs. All things considered, that’s a YTD return of about 2% down. In other words, owning KWEB stock isn’t necessarily for the faint of heart.

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

Speaking of holdings, KWEB’s top holdings include some of the biggest names in China’s tech industry. Tencent Holdings (TCEHY) leads with 10.22%, followed by Alibaba Group (BABA) with 9.72%. Other major players in the mix include 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 10 top holdings account for over 61% of the fund’s total assets, indicating a concentrated bet on the sector’s leading players.

For investors looking for income, KWEB offers an annual dividend. The last payment was $0.46 per share, which translates to a dividend yield of about 1.67%. While this isn’t a high-yield play, this dividend adds a welcome income component to a growth-oriented ETF.

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

KWEB’s strategy of offering exposure to Chinese internet stocks 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 better navigate regulatory challenges and market volatility.

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 rebound 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. Still, investors should be aware of specific geopolitical risks and proceed accordingly.

As of the date of publication, Ebube Jones did not have (directly or indirectly) a position in any of the securities mentioned in this article. All information and data in this article is for informational purposes only. For more information, please see Barchart’s Disclosure Policy here.