Investors are currently looking to find those pockets of opportunity to log their losses as they offset capital gains as the year draws to a close. China has proven to be a good opportunity for investors looking to sell individual ADRs at a loss this year, but with strong fundamentals on the China side in many sectors, particularly within tech, investors should consider capitalizing on the trade of the year opportunity by reinvesting into the ETF that has brought in over $7 billion in flows this year: the KraneShares CSI China Internet ETF (KWEB).
By selling a singular ADR exposure and buying KWEB, investors are able to capture loss without losing their exposure to a promising segment of the Chinese markets, reduce their concentration risk in times of market volatility, and reduce their geopolitical risk through the careful management by KraneShares in navigating the current regulatory environment.
The Chinese tech sector has been hit hard this year, with regulations causing some restructuring and a lot of uncertainty, especially for foreign investors. Investors who had invested in single exposure to major tech giants such as Alibaba (BABA) have seen stocks drop almost 50% YTD, while Baidu Inc. is down nearly 35% YTD, indicating a prime opportunity for selling at a single loss in order to offset gains elsewhere.
However, when looking to reinvest, advisors and investors shouldn’t discount the China tech sector as an opportunity for gains in the coming year, but instead should maintain exposure more broadly. The performance of the KraneShares CSI China Internet ETF (KWEB) over this past year speaks volumes, literally, to the potential that savvy investors see within the space.
So far this year KWEB — which has exposure to China-based internet and internet-related companies — has brought in almost $7.9 billion in flows, despite the price falling amidst regulatory pressures in the middle of the year. The companies contained within the fund and underlying index have pivoted to meet new regulations within China and are exhibiting growth. By investing across more than just one single company, investors are able to reduce their concentration risk in the midst of volatility.
For investors who are concerned about geo-political risk as Chinese companies face eventual delisting by 2025 under current HFCAA and Chinese regulations, investing with a firm that is working to navigate the regulatory environment can take much of the stress off for both advisors and investors.
“Investing in a ‘hot’ space through one company is rarely a good idea,” said Dave Nadig, ETF Trends’ director of research. “A lot of investors got very excited about some U.S.-listed Chinese tech companies in the past few years. The current market may represent an unusual opportunity to sell those at a loss, while reallocating into a broad China or China-tech ETF.”
KWEB Poised to Capture Potential Growth in 2022
Reinvesting broadly instead of gaining exposure through a single company is a smart trade within China’s internet and tech sector. With the record inflows as investors bought the dip this year, KWEB is one of the biggest funds within the space. The conversion from a single ADR to KWEB allows investors to capture a loss without losing exposure, reduce concentration risk, and reduce geo-political risk.
Selling a single exposure, such as BABA or Baidu, to harvest the tax benefit and replacing that exposure with a position in KWEB allows investors to not only reap the potential tax benefit, but also gain more diversified exposure to the same attractive segment of Chinese tech stocks.
The KraneShares CSI China Internet ETF (KWEB) tracks the CSI Overseas China Internet Index and measures the performance of publicly traded companies outside of mainland China that operate within China’s internet and internet-related sectors.
This includes companies that develop and market internet software and services, provide retail or commercial services via the internet, develop and market mobile software, and manufacture entertainment and educational software for home use.
KWEB provides exposure to the Chinese internet equivalents of Google, Facebook, Amazon, eBay, and the like, all companies that benefit from a growing user base within China, as well as a growing middle class.
Its top holdings include Tencent at 10.26%, Meituan at 8.09%, and JD.com at 6.82%.
The ETF has an annual expense ratio of 0.70%.
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