The collapse of Chinese tech has been one of the stand-out horror stories in a largely optimistic global recovery period but this could soon change according to some asset managers.
With South China Morning Post Research citing more than 50 regulatory actions taken against Chinese software companies since November 2020, some of the biggest names in the country’s technology sector have faced adverse impacts from the Chinese Communist Party’s (CCP) efforts to quickly implement its vision for sustainable growth across different regulatory silos.
Evidencing this, the Hang Seng TECH index and Solactive China Technology index both recently hit their lowest point since May 2020 while the CSI Overseas China Internet index has fallen to a level it last saw at the end of 2016.
While these declines are notable, JP Morgan said in its recent China market outlook it expects the worst of the CCP’s regulatory action to have passed while growth momentum would bottom out in the latter stages of 2021.
Invesco’s CIO for Asia ex Japan, Mike Shiao, predicted policies for ‘common prosperity’ will continue to impact equity markets in 2022 and beyond, however, argued clearer communication of new regulations will present attractive buying opportunities in areas such as e-commerce and food delivery.
For those willing to brave the uncertainty of CCP policymaking and those viewing Chinese tech as being price at an appealing level, here are five ETFs offering targeted exposure to the sector.
1. KraneShares CSI China Internet UCITS ETF (KWEB)
Understandably, the list begins with the $586m KWEB, the European cousin of the $6.8bn KraneShare CSI China Internet ETF, which currently stands as the largest China equity ETF.
Tracking the CSI Overseas China Internet index of 52 stocks not listed in Shanghai or Shenzen, KWEB offers a concentrated view of internet and internet-related companies, with a significant 10.4% weighting to Tencent alone.
Given its focus on overseas companies, KWEB was acutely exposed to the state’s crackdown on the use of American Depository Receipts (ADR) by Chinese firms. This has seen it underperform even the meagre returns of its product category, plummeting 58.4% over the past 12 months, as at 28 January, according to data from ETFLogic.
While to some this might KWEB is the standout buying opportunity within its class, it also commands the highest fee by some margin with a total expense ratio (TER) of 0.75%. It is also the oldest having launched in November 2018.
2. HSBC Hang Seng Tech UCITS ETF (HSTE)
Next is the second-largest ETF in the class, the $232m HSTE, which came to market in December 2020.
Charging a fee of 0.50% and tracking the Hang Seng TECH index, HSTE takes a concentrated position in the 30 largest Hong Kong-listed stocks involved in technology.
The index also picks its investment universe based on companies’ exposure to tech themes such as cloud, digital, e-commerce, fintech and the internet, and those with “strong” research and development (R&D) investment and high revenue growth. Each constituent is capped at 8%.
Not suffering quite as badly as KWEB during last year’s tech sell-off, HSTE has returned -39.5% over the past 12 months and -18.3% over the trailing half-year.
3. UBS ETF Solactive China Technology UCITS ETF (CQQQ)
Moving down the list and not to be confused with the Invesco China Technology ETF (CQQQ) from the US, is UBS Asset Management’s own CQQQ with $31m assets under management (AUM).
Launching in May 2021 with a TER of 0.47%, CQQQ offers a broader exposure by tracking the 100-stock basket of the Solactive China Technology index which targets the largest tech-driven Chinese companies deriving their revenues from activities such as cloud computing, medical technologies, future mobility and digital entertainment.
Despite not being as concentrated as its larger peers, CQQQ offered middling returns of -24.5% over the past six months.
4. Invesco MSCI China Technology All Shares Stock Connect UCITS ETF (MCHT)
Marginally smaller and younger than CQQQ is Invesco’s effort to capture Chinese technology through the ETF wrapper, the $28m MCHT, which launched June last year.
With a fee of 0.49% and tracking the MSCI China Technology All Shares Stock Connect Select index, MCHT offers a diametrically different way of addressing China tech versus its larger peers.
Tracking the performance of 99 stocks across several sectors involved in tech, MCHT is interesting as it captures Chinese tech firms listed on venues in different geographies. It allocates to B-Shares, H-Shares, Red-Chips, P-Chips, ADRs and even mainland A-Shares that have stock connect listings.
By doing this, MCHT includes shares listed in the US, Hong Kong, Shanghai and Shenzhen within one sector ETF.
Likely owing to its broad approach and inclusion of A-Shares, the ETF has booked a more modest decline of -8.5% over the past half-year.
5. iShares MSCI China Tech UCITS ETF (CTEC)
Closing out our list is the youngest and ETF of the class, the $14m CTEC. Issued by BlackRock, the ETF is also the broadest and lowest fee in class.
Launching in December 2021 with a TER of 0.45%, CTEC offers exposure to 178 stocks captured by within the MSCI China Technology Sub-Industries ESG Screened Select Capped index.
Allocating to large and mid-cap companies involved in China’s tech industry, the index also applies a screen against companies involved in civilian, controversial or nuclear weapons, tobacco, thermal coal, oil sands and thermal coal-based power generation that are not compliant with the UN Global Compact principles.
Over the last month, CTEC has fallen 8.7%, an inauspicious start but in keeping with the broader product class.