Why This China ETF Will Rise Again

With the United States and China, the world's two largest economies, both seeming unrelenting in the latest trade tiff, these don't seem like the days to embrace China exchange traded funds. Down about 7% just this month, the MSCI China Index would appear to confirm as much.

What Happened

Chinese internet stocks really don't look like the place to be in the current climate as highlighted by an August decline of more than 11% by the KraneShares CSI China Internet ETF KWEB. It's easy to say that with that ETF almost 27% below its 52-week high and while KWEB doesn't need to be bought today, investors should not ignore the fund's redemption potential.

Why It's Important

KWEB has previously been spurred higher by the China equivalent of FANG known as BAT: Baidu BIDU, Alibaba BABA and Tencent TCEHY. A new acronym, TMD, could serve as a major driver of KWEB's renaissance.

“Now there is a new acronym in town representing the 'second wave' of Chinese internet giants,” said KraneShares in a recent note. “Born in the era of mobile technology, and all less than ten years old, Toutiao, Meituan-Dianping, and Didi form the new acronym TMD (which is also ironic shorthand for a common Chinese expletive).”

Meituan-Dianping has already ascended to the third spot on KWEB's roster, commanding nearly 7.6% of the ETF's weight. Didi, the Uber of China, is expected to have an initial public offering next year.

Toutiao, something of a Chinese equivalent of Twitter, could have an IPO at some point this year.

“Meituan’s super app is a fully integrated app for everything from on-demand delivery to booking flights and transferring money,” according to KraneShares. “In the first half of 2018, Meituan facilitated $2.77 billion in food delivery transactions alone for more than 350 million people in 2,800 cities.”

What's Next

Valuations for TMD are in the ballpark for those of BAT, but that's actually a plus when considering now lengthy valuation compression for Chinese internet stocks has that group looking inexpensive relative to its U.S. rivals.

“While some see TMD as competition to BAT, in reality, both acronyms reflect the enormous opportunity in China,” said KraneShares. “For over a decade, China has had the largest internet-connected population in the world.

As a percentage of China’s population, however, this figure is relatively low at only 59.6%. This statistic highlights both the size of China’s society and the continued potential for growth of its internet population.”

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