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The best ETFs to access China’s exciting tech industry

China’s tech sector is now something no investor can ignore. Here’s how you can invest using ETFs.

19th November 2020 13:04

by Tom Bailey from interactive investor

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China’s tech sector is now something no investor can ignore. Here’s how you can invest using ETFs. 

The era of China as a place where goods for rich countries are made is fast approaching an end. Over the past few years, China’s tech companies have become increasingly prominent and successful, whether it be e-commerce, gaming or artificial intelligence. As a result, Chinese tech is no longer something investors can ignore.

So how can exchange-traded fund (ETF) investors go about gaining Chinese tech exposure?

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Perhaps one of the most obvious choices would be KraneShares CSI China Internet ETF USD (LSE:KWEB). As an ETF that specifically tracks a basket of Chinese internet firms (using the CSI Overseas China Internet index), it could be described as a “pure play” bet on Chinese tech.  

The ETF’s holdings are as you would expect. Its biggest company is internet giant Tencent (SEHK:700) at about 10%, followed closely by e-commerce Goliath Alibaba (NYSE:BABA) and food delivery company Meituan (SEHK:3690). Other big names also make the top 10, such as Baidu (NASDAQ:BIDU), NetEase (NASDAQ:NTES), and (NASDAQ:JD). If you want exposure to China’s tech and internet giants, this seems like a straightforward option. The only obvious downside is that it has a relatively high expense ratio, or annual fee, of 0.76%.

However, this is not the only way to gain decent exposure to Chinese tech. The sector’s rapid growth in recent years means many indices tracking Chinese stocks, and by extension the ETFs mirroring them, have become dominated by tech firms. As a result, those looking for China tech exposure do not necessarily need to buy pricier “pure play” options.

For example, one of the most popular indices used to gain exposure to China is the MSCI China index. This index is tracked by a wide range of ETFs, including HSBC MSCI China ETF GBP (LSE:HMCH), with an annual fee of 0.6%, and Xtrackers MSCI China ETF 1C GBP (LSE:XCX6), which tracks the same index for 0.65%.

The MSCI China index itself is now dominated by tech firms. While the sector breakdown of the index gives a weight of just 5% to Information Technology, that doesn’t tell the whole story. Just like with US indices, what we colloquially call “tech” often comes under different sectors. For example, Alibaba, being e-commerce, is classed as consumer discretionary, while Tencent is consumer services. These two tech firms dominate the index, with Alibaba at around 20% and Tencent at 15%.

Other stocks seen as “tech”, but outside the official technology classification, are also dominant. For example, Meituan and online retailer both account for 4.7% and 2.5%, respectively, and count as consumer discretionary. Also in the top 10 are internet company Baidu and online gaming firm NetEase, both of which come under consumer services. So don’t be fooled by ETFs tracking the MSCI China index that have an official weighting towards “information technology” – just as with the S&P 500, China’s biggest “tech” firms are to be found under different categories.

So, in practice, anyone buying into an ETF tracking the MSCI China index is gaining hefty exposure to large Chinese tech firms. In the same way anyone wanting exposure to US large-cap tech can now just buy the S&P 500, those wanting large-cap China tech can buy the MSCI China index.

Those who may want increased exposure to Chinese tech, and opt for a specific China tech fund, should be aware of how much exposure they already have. Buying a pure-play China tech ETF means duplicating some of your holdings if you already have a large weighting through an existing China ETF holding.

And that brings us to the crucial next point: not all Chinese indices and ETFs have such a large tech weighting. Those hoping to gain tech exposure through a broad China ETF must understand what the index they are tracking comprises.

For example, many popular China ETFs track the MSCI China A-Shares index. A-Shares are companies listed on mainland China. However, many Chinese tech firms are actually listed in New York.

While the previously mentioned MSCI index tracks Chinese firms listed in both mainland China and abroad, the MSCI China A index tracks only domestic-listed firms. As a result, many of China’s big-name tech companies are absent.

The top 10 holding of the MSCI China A index is notably different. Its largest holding, accounting for around 5%, is Kweichow Moutai, a partially state-owned drinks and goods company. Second is Wuliangye Yibin, also an alcohol company. In terms of sector, the largest weighting is financials at just over 20%, followed by consumer staples.

This index is by no means a bad one to track. It provides exposure to a broad range of Chinese stocks and the domestic Chinese economy. Since the start of the year, the index has returned around 25%. One way to track this index would the iShares MSCI China A ETF USD Acc (LSE:CNYA).

However, what is missing here is exposure to Chinese tech. One option is for investors to gain China exposure through an ETF that tracks the MSCI A index and then add Chinese tech through an additional ETF. The KranShares Chinese internet ETF mentioned above would be appropriate for this. 

A very popular option for Chinese tech fans is EMQQ Emerging Mkts Internet&Ecomm ETFAcc (LSE:EMQQ). This ETF aims to provide exposure to internet and e-commerce companies in emerging markets. However, China is a leader among emerging markets, meaning that Chinese companies account for 60% of the ETF.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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