As has been widely documented, Chinese Internet stocks are surging this year, a trend that is benefiting exchange traded funds, such as the Guggenheim China Technology ETF (NYSEArca: CQQQ). In fact, CQQQ is one of this year’s best-performing non-leveraged ETFs with a gain of over 68%.
China has been a world leader in the online commercial retail space as it draws upon its large group domestic consumers and rising middle-income base. Consequently, a China tech-related exchange traded fund has been among the best performers over the past five years and may continue to lead.
Supporting this growth trend in the Chinese technology segment, China overtook the U.S. to become the largest e-commerce or online commercial retail market in the world based on value and is on track to be worth $840 billion in 2021, or almost double the estimate size of the U.S. e-commerce sales in the same period, according to McKinsey data. The e-commerce growth in China exceeds the U.S.’s rate of growth by about four times.
CQQQ, home to $310.4 million in assets under management, is nearly eight years old. The ETF tracks the AlphaShares China Technology Index.
“As of today, China continues to dominate the internet market, as it has more than 720 million users, which is higher in comparison with its counterparts from India and U.S. combined. However, Chinese internet penetration rate is only 53%, which is lower in comparison with its neighbors like Japan and South Korea that have a penetration rate of 93% and 90%, respectively,” according to a Seeking Alpha analysis of CQQQ.
A number of factors are supporting the outperformance in Chinese technology company shares, such as the growing Chinese economy, the ongoing shift from an export-oriented economic model to greater domestic consumption and rising popularity of online shopping – according to official Chinese data, online sales of physical goods jumped 28.6% in the first six months of the year to 2.37 trillion yuan or $350 billion and now make up 8.5% of China’s overall retail sales.
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Furthermore, many of these Chinese companies have diversified their businesses to capture greater growth potential. Many China tech companies have started out as social media firms that expanded through advertising, but they would also diverse into other areas like finance to help provide better diversification benefits, which have in turned helped greater investments.
“Improvement of the Chinese infrastructure, on the other hand, will help to boost the ecommerce market, as the number of consumers will increase and the diversity of products will tackle different demographic groups,” according to Seeking Alpha. “If we take a look at the diagram below, we will see that ecommerce retail sales will continue to grow on an annual basis and the overall market is expected to be worth $840 billion by 2021.”
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