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.

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