China Internet ETF: A Buy The Dip Opportunity?

Chinese Internet stocks haven't been immune to the slump in that country's equity markets or the broader emerging markets complex. The KraneShares CSI China Internet ETF KWEB, the dominant name among China Internet exchange traded fund, is down 26.5 percent year-to-date following a 5.24 percent decline Thursday.

Some investors may argue the fundamentals for KWEB's holdings belie the fund's recent price action, possibly positioning the fund as a buy-the-dip candidate.

What Happened

Ongoing trade tensions between the U.S. and China are among the reasons KWEB is slumping this year. Those issues coupled with some disappointing data out of the world's second-largest economy are plaguing Chinese stocks, including Internet names.

“Every day we read about trade tensions and China’s slowing GDP growth, but what has been overshadowed is the continued growth of China’s services sector, retail sales, and the expanding universe of publicly traded Chinese internet companies,” said KraneShares in a recent note. “We believe this is a great example of noise and sentiment creating investment opportunities.”

Over the near term, there's the potential for easing trade tensions between the U.S. and China as President Trump and China's President Xi Jinping are scheduled to meet at the G-20 summit later this month.

Why It's Important

This year, the gap between Chinese and U.S. Internet stocks is as wide as it has been since KWEB debuted more than five years ago. Last year, KWEB beat the U.S.-focused Dow Jones Internet Composite Index by more than 3,000 basis points, but this year, the Dow Jones Internet Composite Index is up more than 18 percent.

That chasm is highlighted by a comparison of Amazon.com Inc. AMZN and Alibaba Group Holding Ltd. BABA. Shares of Amazon are up 50 percent this year while Alibaba, often compared to Amazon, is down 13.59 percent. Some data points, beyond China's slightly disappointing third-quarter GDP report, portend well for KWEB.

“The media focused heavily on China’s underperforming GDP growth numbers rather than highlighting the performance of its services sector which experienced 7.7% growth compared to just 5.8% growth in the industrial sector,” said KraneShares. “Additionally, retail sales beat expectations, growing by 9.2% versus a 9.0% estimate.”

What's Next

A wave of initial public offerings (IPOs) could also benefit KWEB, which has added a few new stocks this year.

“So far in 2018, Chinese tech companies have generated more value from their IPOs than any other sector in the mainland or Hong Kong markets, raising a total of $12.8 billion while industrial companies have only raised $2.9 billion,” said KraneShares. “In fact, 2018 has been the most lucrative year for Chinese tech IPOs since 2014, accounting for 40% of all the cash generated by tech IPOs worldwide.”

Related Links:

Another China Internet ETF Debuts

Check Out The Pet Industry ETF