KraneShares Launches Second China ETF

NEW YORK (TheStreet) -- If nothing else, China continues to be one of the most complicated and controversial investment destinations with very strong opinions for both the bull and bear cases.

On the one hand, China has hundreds of millions of its population become wealthier and spending more money contributing to a GDP growth rate that exceeds 7%. On the other hand, there are issues with overcapacity, a shaky financial sector and GDP growth has slowed down to slightly better than 7%.

Just about every ETF provider offers funds with different ways into China including new provider KraneShares, which in late July launched the KraneShares CSI Five Year Plan ETF ( KFYP). Last week the company launched the KraneShares CSI China Internet ETF ( KWEB), its second fund, and it has several more China-centric funds in registration.

Most of the fund's larger holdings will be familiar, such as seach engine Baidu ( BIDU), which is the largest holding at 10.2%; Tencent Holding ( TCEHY), a provider of various internet services at 9.4%; and gaming company Netease ( NTES)at 6.4%. A less-familiar name might be virus software company Qihoo Technologies ( QIHU), which has 7.9% weighting.

Like many China ETFs, KWEB can own companies, like BIDU, whose primary listing is on a U.S. exchange. The specific requirement for inclusion is that at least 50% of a company's revenue comes from mainland China.

Over the past few years the broader China funds like the iShares China Large Cap ETF ( FXI) have done poorly. Year to date, FXI is down 11% and is still down 47% from its 2007 high. As the broad market in China has limped along, the tech sector as measured by the Guggenheim China Technology ETF ( CQQQ) has done very well, rising 32% in 2013.

As we have talked about in recent articles, the reason has to do with the demand for Internet services, games and shopping that contribute to what Chinese people perceive as the American lifestyle. Despite the macro economic issues that could be holding back the overall market, more and more Chinese are able to spend time and money on the internet which will benefit the companies included in KWEB.

As mentioned above, KraneShares just listed KFYP a few weeks ago, which is the company's first fund. KWEB has a lot of overlap with KFYP. KFYP has 35% in tech names and its two largest holdings are Baidu and Tencent, which currently add up to 26% of KFYP. This means there is a high likelihood that the two funds will trade very similarly most of the time.

This week Internet portal Sina ( SINA), which is a holding in both funds including a 4% weighting in KWEB, reported earnings far above estimates providing another boost to the group. This raises a final point to consider, which is just how hot the Chinese tech sector has been.

Although KWEB just started trading, several of its larger components are up dramatically this year: Baidu up 37%. Tencent up 44% and Sina up 59%, and many of these gains have been concentrated in the last two months.

While Chinese demand for internet services and tech gadgets is promising for the longer term, it would make sense to wait for a pull back or only putting on half of a normal position until a pullback or at least until the huge run consolidates.

At the time of publication the author had no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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