A China ETF Proving Its Potency As A Coronavirus Play

All things considered, 2020 is proving to be a surprisingly decent year for China exchange traded funds, but some are strutting their stuff more than others.

What Happened: One way of capturing outperformance with China ETFs is to avoid broad-based funds and focus on sector and industry ideas, some of which are scorching hot. That includes the KraneShares CSI China Internet ETF KWEB.

KWEB certainly merits a place in the conversation regarding hot internet ETFs, proving that that theme isn't confined to domestic offerings. Speaking of U.S. internet ETFs, all KWEB is doing this year is beating the largest domestic fund in the category by 640 basis points.

Here's the kicker: KWEB is doing so while being nearly 200 basis points less volatile.

Why It's Important: Home to the likes of Alibaba BABA and JD.com JD, KWEB is highly levered to the Chinese consumer's growing affinity for online retail, an industry getting a positive jolt from the coronavirus pandemic.

“As a result, online retail sales of goods will account for an increasing share of total retail sales, a trend that will be irreversible,” Fitch Ratings said in a recent note.

“Fitch expects the ratio of e-tailing sales to total retail sales (goods only) to climb in the rest of 2020, after hitting a historical high of 26.5% in 5M20 (monthly record high of 29.7% in March 2020). The ratio rose by 4.9pp, 5.2pp, 5.3pp and 5.3pp yoy in 2M20, 1Q20, 4M20 and 5M20, respectively. This compared with increases of 4.0pp in 2018 and 2.6pp in 2019, indicating that consumers have shifted towards e-tailing faster during the COVID-19 crisis.”

KWEB components are making strides toward cementing China's status as an e-commerce juggernaut.

“These include online payment tools, such as payment via facial recognition,” said Fitch. “The country's advanced express-delivery network will also be a boost, rather than a bottleneck, for China's e-tailing sector to prosper.”

What's Next: KWEB's run may not be over: e-commerce remains a small slice of the broader Chinese retail market, although COVID-19 is expanding the industry's footprint. Plus, the country's demographics bode well for increased adoption of online retail.

“China had low e-tailing penetration rate of 49% of the total population at end-2019 versus over 60% for most developed countries, largely due to China's lower urbanisation rate of only 61%,” according to Fitch.

“The Chinese government aims to increase the urbanisation rate to developed nations' levels by 2050, which will boost demand for online shopping. Besides, about 59% of China's population is aged 20-59, a higher share than in most developed nations. This age group is generally more receptive to e-tailing and are more frequent internet users.”