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Forget A-Share Inclusion; KWEB Is The Best Chinese ETF Play

Financial Alphas profile picture
Financial Alphas


  • MSCI A-share inclusion has been followed by weak Chinese equity performance.
  • However, China has to be a staple of any investor's globally-exposed portfolio.
  • Most broad ETFs are dogged down by exposure to state-owned companies; KWEB offers direct exposure to the real driver of Chinese growth: consumer tech.

Several months into MSCI’s (MSCI) much-talked-about, highly-anticipated and symbolic A-share inclusion, Chinese equities haven’t lived up to the billing; around the time of inclusion, the Shanghai Composite entered a bear market.

Shanghai CompositeShanghai Composite since December 2017. Source: Financial Times.

Yet, amid all of the interest in Chinese equities, MSCI China was never the best way to gain exposure. Trade tensions between the US and China show no signs of abating and there has been little progress in making state-owned monoliths more efficient. In fact, as if deleveraging concerns weren’t already high, regional banks are showing visible signs of strain. As trade tariffs continue to be exchanged, the Chinese firms most affected are those in the business of import and export; the majority of which are state-backed.

Issues with broader indices

I see China like this: consumer-focused and everything else. Addressing the latter, a large number of these firms are state-owned and are seeing tech firms disrupting their business lines. Let’s take financials as an example:

  • Bank deposits: Chinese depositors have been taking money out of their banks’ deposit and checking accounts to put into money market funds. In fact, China is now home to the world’s largest money market fund, which is owned by Alibaba’s (BABA) affiliate Ant Financial.
  • Payments: It often seems like an exaggeration, but nobody pays with cash in China anymore; it’s all done through online payment platforms. The two most popular, by far, are Alipay and WeChat Pay, from Ant Financial and Tencent (OTCPK:TCEHY), respectively.
  • Credit data: Because a large percentage of payments are done over mobile platforms, and because e-commerce platforms all use a form of credit lending for users, these tech firms have the best credit data in China.

Chinese banks simply can’t compete. Therefore, it begs the question as to why investors would want

This article was written by

Financial Alphas profile picture
If you have any suggestions or ideas for future analysis, just get in touch via Seeking Alpha message. China, tech, autos, Hong Kong, Greater Bay Area

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (11)

I agree kweb better choice vs like vwo. don't want other countries with warts. want Chinese tech without the govt run cockroaches.
grok42 profile picture
How would you compare CWEB vs KWEB, ignoring the leverage aspect? Good article.
Financial Alphas profile picture
Thanks. I haven't looked into it, but i will probably do a comparison of the China internet ETFs soon.
Market Mason profile picture
The only difference is the leverage aspect so there's nothing to compare. They are both based off of the CSI Overseas China Internet Index.
Expense ratio 0.72%, higher than yield 0.63%.
Financial Alphas profile picture
That's not a valid metric to use when looking at Chinese or tech firms, especially Chinese tech firms. Neither tend to pay dividends, so you buy the ETF for the capital appreciation, not the yield.
Just think the expense ratio is high, so I prefer the big tech names.
cqqq also seems like a nice etf for Chinese tech
Financial Alphas profile picture
Yeah i agree you with. I personally prefer KWEB because of the liquidity.
Evil Enantiomer profile picture
I prefer $KWEB too as it has more exposure to $IQ and $JD.
Great article! I went with KWEB also because of the liquidity... the bid/ask spread on the CQQQ was too wide for my taste.
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