The two foreign ETFs hold the Chinese version of FAANG stocks, in this case known as BATs—Baidu, Alibaba, and Tencent Holdings. KWEB’s top three holdings are Tencent at 9.8 percent, with Alibaba Group at 8.8 percent and Baidu at 8.5 percent. Its expense ratio is 72 basis points and it has $1.4 billion in AUM.
EMQQ’s Chinese holdings are 62 percent of the fund, and adding other Asian countries brings that continent’s total to 76 percent of the portfolio. Tencent is its largest holding at 7.6 percent, followed by Naspers at 7.5 percent and Alibaba at 7.1 percent. EMQQ has an expense ratio of 86 basis points and has $455 million in AUM.
Can It Play In The U.S.?
There can be a lot of short-term noise around internet stocks, and Maguire says the best way to evaluate them is to focus on the topline growth. While profitability is important, it hasn’t always mattered. Take Amazon, for instance. For years the company wasn’t profitable, but they were building investments in the right areas, he says.
“As long as you have faith in the direction that the company's going and the revenue growth in their investments is proving fruitful,” it’s a good sign, Maguire says.
Kessler says CFRA continues to like the FAANG stocks, but given the run up in prices he says they’re less constructive on them.
Despite their current weakness, Kessler says the Chinese internet companies are going to be part of the longer-term equation. Four of the top 10 largest global internet companies are Chinese: Baidu, Alibaba, Tencent and JD.com, an online specialty retailer, according to S&P Capital IQ. The other six are U.S.-based.
Kessler adds that the BATs have been tremendously aggressive with their internal and external investment. “Because of that they're not as concerned about the quarterly changes in earnings. They want to create and dominate these new categories and in many cases are kind of mirroring what they're seeing going on in the U.S.,” he says.
But Kessler notes that some of the leading Chinese companies are essentially the same thing as U.S. companies—i.e., Alibaba is often thought of as the Amazon of China, while Weibo is categorized as the Chinese version of Twitter. So the question becomes when these companies try to expand beyond China will anyone use them or will they stick with the U.S. versions? Even though these are big, powerful companies in China, for the most part they haven't been tested outside of the controlled Chinese environment.
Chinese internet and technology stocks are much more highly correlated to the overall markets, says Pai from Fiduciary Trust Company International. In the U.S., technology stock performance contributes 40 percent to the overall market performance, but it can be 60 percent for Chinese markets.