Among the top-performing ETFs lately is KraneShares CSI China Five Year Plan (KFYP), which began operating in July. During the past three months, the fund returned 7.6%, compared to 1.6% for the broad SPDR fund. KraneShares aims to hold stocks that will benefit from the government's massive efforts to reform the country.
In its latest five-year plan, the regime describes how it aims to modernize the economy and tackle problems such as air pollution and a lack of consumer goods. The Chinese plan calls for huge expenditures on sectors such as health care, clean energy, and the Internet. The KraneShares fund has 40% of assets in technology, 27% in consumer stocks and 5% in healthcare. "The Chinese leadership is implementing big changes -- and not just paying lip service to reform," says Brendan Ahern, managing director of KraneShares.
Huge growth in the Internet has boosted technology ETFs. During the past year, Guggenheim China Technology (CQQQ) returned 60.2%. Chinese consumers have embraced Internet shopping. There are now 190 million online shoppers, more than in the U.S. In the next few years, the country plans to spend billions of dollars to spread Internet shopping to cities in the interior that still have limited access.
Much of the excitement has focused on the coming initial public offering of Alibaba, the biggest Chinese e-commerce company, which has features of Amazon.com (AMZN) and eBay (EBAY). In the second quarter the company's revenue jumped 60% to $1.7 billion, while net income more than doubled to $707 million. Alibaba is expected to sell about $10 billion in shares and have a market capitalization of around $100 billion.
While Chinese Internet companies are showing impressive growth, the stocks could be getting rich, says Dennis Hudachek of IndexUniverse.com. He cautions that Internet shares could retreat after the excitement of the Alibaba IPO dies down. Hudachek compares the Chinese surge to the rally of U.S. Internet shares that occurred in anticipation of the Facebook (FB) IPO in May 2012. Once Facebook launched, you had a little bit of a hangover and some companies sold off, he says.
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