China Internet ETF May Not Need Alibaba

October 4th at 8:30am by Tom Lydon

Exchange traded funds offering exposure to Chinese Internet and technology shares have been star performers in what has been an otherwise mediocre year for ETFs tracking the world’s second-largest economy.

One theory is the China Internet ETFs have been bid higher on speculation of an initial public offering from e-commerce giant Alibaba. Earlier this week, Citigroup pegged Alibaba’s valuation at $90 billion. Some have said the company, which is likely to list its shares in the U.S. not Hong Kong, could see a valuation of $100 billion. Those are staggering numbers, but they do not mean funds like the KraneShares CSI China Internet ETF (NasdaqGS: KWEB) need Alibaba to keep trucking higher.

“The average investor in America doesn’t know about Alibaba,” said KraneShares Managing Director Brendan Ahern in an interview with ETF Trends at the Morningstar ETF Invest Conference in Chicago.

KWEB’s timing has been good. The ETF debuted in early August within weeks of the ramp-up of Alibaba IPO speculation. KWEB has since surged 19%, but there is only so much a still private company like Alibaba can do to help any ETF. [KraneShares Adds China Internet ETF]

Ahern attributes some of KWEB’s immediate success to fundamental factors.

“There are only 140 million Chinese with broadband Internet access,” said Ahern. “Most of the companies in KWEB are e-retailers with very strong growth. More and more Chinese are joining the middle class, so there is still room for these companies to grow. KWEB is not dependent on an Alibaba IPO.”

KWEB has a capping component that ensures none of its almost 25 holdings dominate the ETF. Tencent Holdings, China’s largest Internet company, and Baidu (NasdaqGM: BIDU), China’s largest Internet search firm, combine for 18.6% of the fund’s weight. Other top holdings include Ctrip.com (NasdaqGM: CTRP), Qihoo 360 (NasdaqGM: QIHU) and Sina (NasdaqGM: SINA). [KraneShares ETFs: China With a Twist]

Even if Alibaba went public tomorrow, which is not happening, Ahern pointed out that the CSI China Internet Index, KWEB’s underlying index, only includes IPOs on a semi-annual basis. If KWEB’s recent returns are any indication, the fund may not need to be in a hurry to add Alibaba.

KraneShares CSI China Internet ETF

ETF Trends editorial team contributed to this post.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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