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New China ETF Targets Nation's Five-Year Plan

NEW YORK (TheStreet) -- Last week we looked at technology as a way to gain exposure to areas of the Chinese economy where money is going to be spent. Such a strategy avoids sectors that may see a slowdown, such as manufacturing.

Right on cue comes the new KraneShares CSI China Five Year Plan ETF (KFYP).

China has historically operated under five-year economic plans. The most recent one was adopted in 2011. The focus of the current five-year plan, according to KPMG, includes domestic consumption, industrial upgrades and sustainable growth. The KraneShares fund's prospectus also identifies other areas targeted by the five-year plan, including agriculture, transportation and alternative energy.

The new ETF is constructed to capitalize on the priorities specified in the current five-year plan. When Beijing's next five-year plan is implemented, the fund will adjust to any changes in it.

For now, technology is by far the largest sector, accounting for 35% of the fund. Other prominent sectors include consumer discretionary at 16%, industrials at 14% and consumer staples at 14%. The individual holdings come from an investable universe of global companies that derive at least 50% of their revenue from China. This includes ADRs traded in the U.S. and shares traded on foreign markets.

KFYP has 161 holdings. Typically, such a number would make for good diversification, but due to the market-cap weighting of the fund, Tencent Holdings (TCTZF:PNK) and Baidu (BIDU) each have double-digit weightings, while the third-largest constituent, Want Want Holdings (WWNTY:PNK), has a 3.3% weight. Obviously, the remaining holdings have smaller weightings than that. Any sort of meaningful price impairment for Tencent or Baidu likely would be a drag on the fund.

The big idea behind KFYP is essentially what I discussed last week. The segments captured in the fund are where China's government has said money will spent, and that should bode well for the companies in the fund.

As I discussed in last week's article, the tech sector is an avenue to what Chinese people perceive as an Americanized lifestyle, and the demand characteristics for this theme are very favorable.

Stock quotes in this article: KFYP, BIDU, FXI 

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