Senate Bill Aimed At Chinese Stocks Isn't Derailing EMQQ ETF

While the MSCI Emerging Markets Index is flat on the year, some consumer- and internet-heavy emerging markets strategies are accelerating to the upside.

What Happened: Take the case of the EMQQ Emerging Markets Internet & Ecommerce ETF EMQQ. Up almost 47% year to date, EMQQ is easily one of 2020's best-performing emerging markets exchange-traded funds.

The fund tracks the EMQQ The Emerging Markets Internet & Ecommerce Index and while it's not a dedicated China, stocks from the world's largest internet market account for 61% of the fund's weight.

Why It's Important: EMQQ is higher by almost 31% over the past 90 days, a period including the passage of S. 945 - Holding Foreign Companies Accountable Act, which was passed by the Senate in May. The aim of that bill is to put Chinese companies listed in the U.S. on a level playing field with other firms and to avoid prevent Luckin Coffee-style frauds from happening again.

Recently, that legislation moved to the back burner, but with Election Day drawing closer, the bill could take center stage again, particularly as President Trump makes holding China accountable a cornerstone of his reelection bid.

Currently, there are 156 U.S.-listed Chinese companies under review, including 11 that are classified as state-controlled enterprises. Of the remaining 145, 100 are considered penny stocks, though the bulk of those names do trade on a major U.S. exchange.

What's Next: Breathing new life into the Holding Foreign Companies Accountable Act could mean a near-term pinch for EMQQ, but it's not all bad news.

“Public Chinese companies that do not adhere to U.S. accounting rules or disclose government ownership or control, especially by the Chinese Government or Communist Party, run the risk of being de-listed from U.S. securities exchanges if the bill becomes law,” said Kevin Carter, EMQQ founder. “With the US Presidential elections coming up later this year, and growing tension between the US and China, the chances of this happening are increasing.”

If the Holding Foreign Companies Accountable Act gets signed into law at some point, a benefit would be it would get rid of some of the dubious Chinese stocks listed in the U.S. while allowing investors to focus on legitimate, quality ideas, including EMQQ holdings.

“However, investors should welcome this as it could flush-out several ‘bad-actors’ in the space and help validate the rest,” said Carter.