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Gaining Chinese tech exposure through ETFs 

Gaining Chinese tech exposure through ETFs

Chinese industries are on the upward trend, leading many investors to place long-term bets on the world’s second-largest economy. Despite the ongoing trade war with the United States, China is now entering the second phase of growth.

Over the past few years, the pace of China’s market liberalization has picked up, prompting major fund providers to include Chinese assets in their portfolios. Foreign investors who were not able to invest directly into Chinese stocks can now gain exposure by buying new products like mutual funds and Exchange Traded Funds (ETFs), that invest in these stocks.

As tech stocks gain momentum worldwide, China’s tech giants can hardly be ignored by investors. The second biggest global hub for unicorns has its own fair share of exciting tech companies. Moreover, the Chinese government has focused on the high-tech industry as an important strategic growth opportunity. The country’s cutting-edge technologies in areas like 5G, e-commerce, and gaming have placed Chinese tech enterprises on the world stage. This has resulted in investors rushing to the ever-growing sector.

New China Tech ETFs on the market

Tech companies out of China have become increasingly prominent and successful, especially during the pandemic. Consequently, a number of new thematic ETFs pertaining to China’s tech sector are also entering the market. The following funds managed by KraneShares, Invesco and HSBC are three of the newest China Tech ETFs.

Invesco MSCI China Technology All Shares Stock Connect UCITS ETF

The Invesco MSCI China Technology All Shares Stock Connect UCITS ETF (ISIN IE00BM8QS095) is the youngest among the ETFs we are looking at in this article. It was launched on June 11, 2021 and focusses on the opportunities created by China’s most innovative technology companies.

The ETF fully replicates the investment results on the MSCI China Technology All Shares Stock Connect Select Index. The underlying index is designed to focus on the performance of Chinese companies that generate significant revenues from developing new products and services from technology innovations, leading to breakthroughs in areas such as internet and digitization, mobility, autonomous technology, industrial automation and digital healthcare.

All companies in the MSCI China Technology All Shares Stock Connect Select Index is assigned a ‘Relevance Score’. The shares of listed companies with a relevance score of 25% or less are removed, and the 100 largest companies are then selected for the final index.

The total expense ratio (TER) of the Invesco MSCI China Technology All Shares Stock Connect UCITS ETF is at 0.49% p.a. Dividends are reinvested (accumulating). Current assets under management (AUM) amount to $4.46 m.

KraneShares ICBCCS SSE STAR Market 50 Index UCITS ETF

Krane Funds Advisors is known for its China-focused ETFs. The global asset management firm launched the KraneShares’ ICBCCS SSE STAR Market 50 Index UCITS ETF (ISIN IE00BKPJY434) on May 26, 2021. The ETF replicates the performance of the index – fully named Shanghai Stock Exchange (SSE) Science and Technology Innovation Board (STAR) Market 50 – by buying all the index components.

The new ETF is the first ETF that provides European investors direct access to China’s STAR Market, also dubbed the ‘Nasdaq of China’. It was launched in 2019 to promote home-grown, high-growth science and technology companies in mainland China. The benchmark index provides exposure to the top 50 listed companies by market cap and liquidity.

The TER of the KraneShares ICBCCS SSE STAR Market 50 Index UCITS ETF is at 0.82% p.a.. Distribution policy is accumulating. The funds size of this fairly new ETF is at $2.79 m.

HSBC Hang Seng TECH UCITS ETF

HSBC has a longstanding presence in China among all foreign financial institutions, through investing in its rapidly changing economy and markets. As per the leading foreign bank in China, the pursuit of self-reliance in innovation and technology will be a pillar strategy for China’s development in the next 5 to 15 years.

Building on this trend, HSBC launched its Hang Seng TECH UCITS ETF (ISIN IE00BMWXKN31) on December 9, 2020. It physically replicates the performance of the innovative Hang Seng TECH Index which includes the 30 largest technology stocks listed in Hong Kong.

The total expense ratio of the HSBC Hang Seng TECH UCITS ETF is at 0.50% p.a. and dividends are reinvested. The fund volume is at $252.6 m (as of June 30, 2021).

Risks investing in tech sector?

China Tech ETFs can provide investors an easy solution to trade in the highest-yielding indices, with a focus on China in the long term. However, investors considering investing in China tech ETF’s should take into account the significant risks of investing in the tech sector in general as well as disruptions such as trade tensions with the US.

Furthermore, tech stocks are subjected to high volatility and are relatively fast-lived. This can boost a portfolio’s performance but also raise the total risk. Tech stocks valuations have also risen sharply. Thus, tech-themed ETFs could be prone to investment bubbles.

Technology companies are also extra vulnerable to competition, which makes the tech market unpredictable and sensitive to disruptions. While investing in ETFs consisting of high-tech companies, investors can consider devoting a segment of their holdings to other, more traditional asset classes.

 

Note: all numbers as of July 2, 2021, unless otherwise indicated.