China: Is There Alpha?

Investors would be wrong in thinking that investing in China had been unprofitable over this past year. Similarly, we believe that avoiding China in the future would be a mistake. To that point, we uncovered some eye-opening details last week during some ETF Think Tank calls. We believe these are worth highlighting:

  1. Setting the Table: There are 47 ETFs, worth about $37.6 billion, that provide targeted access to China. Capturing the global economic growth benefits that will come out of China may take a targeted approach, but the China growth story is too important to ignore in a portfolio.
  2. Regardless of your political stance, China is a growth story, and a focus on technology and the consumer is imperative. Surprise! Healthcare through the KraneShares MSCI All China Health Care ETF (KURE) and the KraneShares MSCI China Clean Technology ETF (KGRN) have proven to be surprise winners, up 26.56% and 75.81%, respectively.
  3. Buying the China growth story when it is out of favor, although cheap in our opinion, takes bravery. However, the momentum is there. China leadership is not irrational and will not benefit by isolating itself economically.
Augment Your Broad Allocations with Targeted China Exposure

There are 47[i] ETFs, worth about $37.6 billion, that provide targeted access to China, but the dollar amount is far greater when an investor considers allocating to certain International or Emerging market funds. Capturing the global economic growth benefits that will come out of China may take a very targeted approach. Examples of international funds that hold over-weighted positions in China include Davis Select International ETF (DINT) at 34%, and the Emerging Markets Internet and Ecommerce ETF (EMQQ) at about 59.15%. The broadest emerging markets funds, like the iShares Core MSCI Emerging Markets ETF (IEMG) and Vanguard FTSE Emerging Markets ETF (VMO), have about 47-48% weightings (including Taiwan and Hong Kong). But, as most ETF Nerds know, these funds are engulfed in state owned bureaucratic value traps. This can be illustrated simply when you compare the performance and holdings of the WisdomTree China ex-State-Owned Enterprises Fund (CXSE) and consider tactical opportunities in your allocation. As an extreme example, KraneShares MSCI China Clean Technology Fund (KGRN) has proven to be a surprise winner, up 75.81% over this past year ending July 9, 2021. We find it funny that, given the media headlines, a U.S. investor would have to assume that clean energy opportunities wouldn’t exist in China.

To highlight this point, below is our overlapping analysis on IEMG using our ETF Think Tank tools. To get into further details, we suggest financial advisors drill deeper by using the ETF Think Tank Tools, which are free to members, or sign up for premium membership and learn what ETF Action shows, and/or ETF Research. A premium membership does not require any cash outlay, but a shared due diligence experience which we believe increases awareness about how structure matters.

[i] Source: ETF Think Tank data base. 47 ETFs include leveraged, inverse and bond Exchange Traded Products, but do not include non-targeted ETFS that hold China exposure.

Investors in Earnings and PEG Ratios Must be Excited

Growth is on sale, and certain investors are grabbing the opportunity. This can be illustrated in the chart that shows how KraneShares CSI China Internet ETF (KWEB) has been hammered by the underperformance of some of its top names (Tencent Holdings and Alibaba Group Holdings) versus the iShares Core MSCI Emerging Markets ETF (IEMG). However, note that the trailing Price Earnings Ratio is only about 22x, and the forward PE multiple is 24x; below the 27.36 avg and below 1 using current estimate levels. The PEG ratio for comparable US companies is about 2X, and this is despite having a total addressable market that is much smaller (See image and chart in the beginning).

None of this is going unnoticed. The share count of KWEB has increased from 46.1 million to 68.4 million, YTD as of July 8, 2021. Clearly, institutions are embracing this $4 billion ETF and the high active share it brings to a portfolio.

China Isolationism

We do not wish to take a political stance in this report. Our motivation is simply to state what is perhaps obvious. The Chinese government is thinking long term, and clearly being aggressive. However, we do not believe that China intends to isolate itself from the world economically. Ultimately, global growth is significantly impacted by the evolution that is taking place in China. The government of China wants to succeed and dominate. For this reason, it makes sense that certain investments may be in the penalty box. However, when growth is cheap and controlling parties are rational, we think a contrary view makes sense.


Our focus on China in the ETF Think Tank these days has not been coincidental, and the discussion with our members who we share due diligence calls with has opened the door to some deep discussions. ETF Strategists and Financial Advisors who share our mission around security selection understand how structure matters. Growth at a reasonable price (GARP) tends to work especially well when the growth is at a discount. The questions asked during our calls makes us all more aware of risks and how the journey might play out for the upside. Shared insights make us all smarter!


The information provided here is for financial professionals only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

All investments involve risk, including possible loss of principal.

The value of investments and the income from them can go down as well as up and investors may not get back the amounts originally invested, and can be affected by changes in interest rates, in exchange rates, general market conditions, political, social and economic developments and other variable factors. Investment involves risks including but not limited to, possible delays in payments and loss of income or capital. Neither Toroso nor any of its affiliates guarantees any rate of return or the return of capital invested. This commentary material is available for informational purposes only and nothing herein constitutes an offer to sell or a solicitation of an offer to buy any security and nothing herein should be construed as such. All investment strategies and investments involve risk of loss, including the possible loss of all amounts invested, and nothing herein should be construed as a guarantee of any specific outcome or profit.  While we have gathered the information presented herein from sources that we believe to be reliable, we cannot guarantee the accuracy or completeness of the information presented and the information presented should not be relied upon as such. Any opinions expressed herein are our opinions and are current only as of the date of distribution, and are subject to change without notice. We disclaim any obligation to provide revised opinions in the event of changed circumstances.

The information in this material is confidential and proprietary and may not be used other than by the intended user. Neither Toroso or its affiliates or any of their officers or employees of Toroso accepts any liability whatsoever for any loss arising from any use of this material or its contents. This material may not be reproduced, distributed or published without prior written permission from Toroso. Distribution of this material may be restricted in certain jurisdictions. Any persons coming into possession of this material should seek advice for details of and observe such restrictions (if any).

Get Think Tanked Distilled with Peter Atwater

Get Think Tanked Distilled with Peter Atwater

The emergence of meme stock mania in 2021 has reinforced the idea that emotion

ETF Industry KPI – 07/19/2021

ETF Industry KPI – 07/19/2021

Week of July 12, 2021 KPI Summary This week, the industry experienced 15 new ETF

You May Also Like