Rebounding China Internet ETF May Have More Room to Run

It is hard to ignore an obvious theme among emerging markets stocks this year. Weakness in Chinese equities is dragging on major developing world benchmarks, such as the MSCI Emerging Markets Index. Chinese internet and technology names are primary culprits.

Last year, the KraneShares CSI China Internet ETF (KWEB), widely viewed as the benchmark exchange-traded fund (ETF) focusing on Chinese internet stocks, returned a staggering 69.7% while the domestically focused First Trust Dow Jones Internet ETF (FDN) returned a paltry-by-comparison 37.6%. In 2017, KWEB also easily outpaced the iShares China Large-Cap ETF (FXI) and the MSCI Emerging Markets Index.

This year, it's a different story. KWEB is down 11.3%, more than double FXI's year-to-date loss. Throwing salt in KWEB's wounds is FDN's year-to-date gain of over 32%. Still, investors looking for a rebound candidate may not want to gloss over KWEB, which recently celebrated its fifth anniversary.

"As of July 31, 2018, KWEB was the number one performing U.S.-listed China ETF and the number one fund in the Morningstar China region category over the past five years," according to KraneShares research. "KWEB achieved a five-year return of 130% cumulative and 18.14% annualized, beating the S&P 500, which returned 85.18% and 13.11%, respectively, over the same time period."

Internet ETF is Maturing

Five years on the market is a significant milestone in the fund industry. That means a mutual fund or ETF has an ample trading history and data to evaluate, and that age is enough to see if investors are embracing the product. KWEB's $1.26 billion in assets under management confirm that the ETF has been widely embraced.

On the note of KWEB's ample trading history, more than five years on the market tells investors that KWEB, just like any other security, does not move up in straight lines. The ETF's recently completed Jan. 28, 2018, through Aug. 14, 2018, decline is its fifth drawdown of 10% or more. In percentage terms, the 27.08% shed by KWEB over that stretch is the ETF's second-worst decline since inception. In terms of time, the recently completed slide was by far KWEB's longest.

KWEB's five years of trading history also indicate that darkness gives way to light in significant fashion. "Declines of 10% to 35% were followed by rebounds of 25% to 116%. On average, these declining periods were down 20% and lasted 63 days, while rebound periods were up 45% and lasted 244 days," according to KraneShares.

Currently, KWEB resides about 10.57% above its 52-week low, which was seen earlier this month. That is a nice move in just two weeks, but the ETF would need to gain another 24% just to reclaim its previous 52-week high. Historical data suggest that another long rebound is possible. One of KWEB's prior rebounds lasted more than 13 months, while another lasted 2.25 years. (For additional reading, check out: Why Alibaba, Tencent, Baidu Can Rise 20%.)

With 37 stocks in its portfolio, the top three holdings are: Tencent Holdings Ltd. ADR (TCEHY) (10.4% of holdings); Alibaba Group Holding Ltd. (BABA) (9.44%); and, Baidu, Inc.(BIDU) (8.57%).