An Epic Stretch For The China Internet ETF

Oft-cited as a proverb, “May you live in interesting times” is actually an old Chinese curse. The hex probably is not in effect, nor should it be, but these are indeed interesting times for the KraneShares CSI China Internet ETF (KraneShares Trust KWEB).

Celebrating Singledom

A big part of the reason this is an important (and interesting) multi-day stretch for KWEB is that Friday is China's Singles' Day, a shopping event that makes Cyber Monday look like a Wednesday in April at the local shopping mall.

Of course, Alibaba Group Holding Ltd BABA is one of the stocks in the Singles' Day spotlight. Alibaba generated $14.3 billion on Singles' Day 2015, a number the Chinese company is expected to easily surpass this year. Alibaba, which accounted for nearly 12 percent of KWEB's weight as of November 9, making it the ETF's largest holding, is off to a banner start this Singles' Day.

The Chinese e-commerce giant is trotting out celebrities of various stripes to promote Singles' Day, including star athletes David Beckham and Kobe Bryant. It would appear the strategy is working. KWEB's largest holding generated $1 billion in sales in the first five minutes of Singles' Day. To put that into context, Alibaba doubled in five minutes the revenue generated by Amazon.com, Inc. AMZN during all of the most recent Prime Days.

China Vs. U.S. Internet ETFs

KWEB is also attractively valued relative to equivalent U.S. internet ETFs.

In a recent interview with KraneShares, Michael Krause of the ETF Research Center explored KWEB's valuations.

“While KWEB’s forward price-to-earnings (P/E) may look high at 38x, P/E doesn’t always tell the full story. KWEB’s long term earnings per share (EPS) growth rate estimate is 36 percent,” said Krause. “Like all the metrics we calculate, we look at the consensus estimates from analysts covering the stocks held by exchange traded funds. These analysts provide estimates on what they believe a company’s earnings per share (EPS), revenue, dividends and other financial metrics will be. Long-term EPS growth is simply the aggregate of Wall Street analysts’ estimates for each of KWEB’s holdings.”

Additionally, index provider MSCI will soon detail its plans to include or exclude more Chinese internet companies in its international indexes. MSCI has afforded Alibaba and Baidu Inc (ADR) BIDU that privilege, but that courtesy could be extended to several other KWEB holdings, including SINA Corp SINA in the coming days.

Increased buying of individual Chinese internet stocks by active managers needing to get in line with MSCI benchmarks could be a near-term catalyst for KWEB.