Although sentiment about China has been broadly negative, there
have actually been plenty of sectors in the nation that have held
up quite well. You might not have noticed this by looking at the
country’s most popular ETF though, as FXI has
fallen significantly in the past few months (see China ETFs
Tumbling on Fears of Credit Crunch).
However, this fund is extremely concentrated in financials, one
sector of the Chinese economy that has been hard hit by the recent
woes afflicting the emerging economic giant. This has led some to
consider new options for China ETF investing that go beyond just
the mega caps and try to tap into more positive (and local) trends
in the nation.
Enter KraneShares and Their First ETF
While a few have tried this approach in ETF form, the latest—and
so far only China-exclusive ETF provider in the U.S.—is
KraneShares. The firm has filed for several China-centric ETFs and
recently made its first product debut with the CSI China
Five Year Plan ETF (KFYP).
This unique ETF looks to invest in companies whose primary
business (or businesses) will be important in the Chinese
government’s current Five-Year Plan. This interesting approach thus
looks to align its holdings with the economic and social priorities
of the Communist Party of China, and their near term plans for the
nation.
Five Year Plan in Focus
The Five Year Plan is arguably the most important and guiding
document for Chinese domestic policies over a half decade period.
The 12th such plan—which is for the period of
2011-2015—was recently put into place, shining plenty of light on
China’s priorities for the next few years.
In the plan, there was clearly a focus on rebalancing the
Chinese economy and to put a greater emphasis on consumption. This
could help the country to become less prone to outside shocks, and
to make China more self sufficient from an economic perspective as
well.
Beyond that, there was also a definite focus on technology,
specifically in terms of the internet and the transformative effect
this has—and will continue to have-- on the nation. Due to this
there has been more talk of developing high tech hubs, and
diversifying the economy more into technology services (also see
China ETFs Surge on Premier’s Growth Pledge).
Another big aspect of the latest plan was on urbanization and
energy use. As China becomes more urbanized, this will put more
strain on the nation’s infrastructure, forcing more investment in
this key area of the nation. However, this won’t be all, as clean
energy also looks to play an important role in alleviating some of
the concerns over pollution in urban areas, as well as mitigating
worries over high oil prices as well.
KFYP ETF Under the Microscope
In order to play this trend, this ETF looks to skew towards many
of the industries highlighted above, while forgoing sectors that,
while important in previous plans, are unlikely to be a focus
during this time frame.
The resulting portfolio is heavily skewed towards technology
companies (36%), followed by consumer discretionary (16.6%), and
industrials (15%). Staples (14.6%) also receive a solid allocation,
while materials, utilities, and health care round out the rest of
the portfolio, leaving nothing for industries like financials or
telecoms.
In terms of individual holdings, Tencent (14%), Baidu (13%), and
Want Want China (3.2%) are the three biggest weightings. It is also
important to note that the product is mostly focused on Hong Kong
listed firms, though it also includes ADRs of companies based in
China as well (also read China ETF Investing 101).
For expenses, the product is in line with many other China ETFs,
charging investors 68 basis points a year in fees. Still, the
product, due to just having been launched, will likely have little
in assets and volume for the time being, so bid ask spreads may be
wide, at least initially.
ETF Competition
KFYP could be an interesting choice to play the second largest
economy in the world, and in a way that could be underrepresented
in many portfolios thanks to traditionally large weightings in
sectors like financials and energy in other China ETFs.
There are a few interesting competitors to this fund though, as
a couple other products on the market also avoid big weights to
sectors like financials and energy. In particular, the relatively
popular PowerShares Golden Dragon China Portfolio
(PGJ) could be a foe with its nearly 55% allocation to
technology.
Beyond that, there are several small cap focused products which
also offer up minimal allocations to sectors like financials or
energy, including HAO from Guggenheim, and
ECNS from iShares. These have seen a decent level
of popularity too, though all have failed to capture the high level
of interest that is in the FXI product (also read The Right and
Wrong Ways to Invest in China ETFs).
It is important to remember that all of these products, unlike
KFYP, will likely continue to focus on the same sectors year in and
year out. The KraneShares product, however, will shift as the Five
Year Plan priorities change in years ahead, suggesting that it may
not always line up with these other, more entrenched
competitors.
Bottom Line
This is a rough time to launch a China-focused ETF, given the
broad concerns over the country’s growth rate and economic health.
This is particularly true if debt concerns continue to bubble up,
or if the nation faces trouble in getting new stimulus measures to
boost the economy.
However, KFYP may be relatively unscathed by these issues and
could be a better pick for investors seeking some China exposure in
their portfolios. This is thanks to its focus on important sectors
that the Chinese leadership is shining the spotlight on, suggesting
that this fund may be worth a closer look for those willing to bet
on the Chinese market now.
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ISHARS-MS CH SC (ECNS): ETF Research Reports
ISHARS-CHINA LC (FXI): ETF Research Reports
GUGG-CHINA SC (HAO): ETF Research Reports
KRANS-C CHN 5YP (KFYP): ETF Research Reports
PWRSH-GL DR HA (PGJ): ETF Research Reports
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