Best Chinese Tech ETFs to Capture Drop in Sector Performance

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Jul. 27 2021, Published 2:17 p.m. ET

Around the first week of July, Chinese tech stocks saw futures dip dramatically. This led Ark Invest CEO Cathie Wood to pull out of most of her ARK ETFs' Chinese positions. The Ark Next Generation Internet ETF (ARKW) fell to 5.4 percent of Chinese stock holdings—its lowest weighting ever.

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Now, brave investors are looking for an opportunity to buy into Chinese tech in hopes of a sector rebound. For some, Chinese tech ETFs are the answer.

How to invest in Chinese tech stocks in a diversified way

The fracture for Chinese tech companies has to do with regulation meant to limit overpowered monopolization. The country's government is getting increasingly stricter. The government is taking its concerns out on companies like DiDi Chuxing, Ant Financial, and—more recently—Tencent. 

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As a result, the sector continues to pose quite a bit of risk. The Chinese government isn't predictable by design. Investing in an ETF instead of individual stocks could help you retain diversification, which ultimately serves as a hedge against volatility.

The best ETFs for Chinese tech exposure

The Invesco Golden Dragon China ETF (NASDAQ:PGJ) is down more than 28 percent over the last month. The shares are at their lowest point since early 2020, following a spike and a subsequent drop in value. Despite that, long-term growth means that there's strong potential for a rebound if the companies can appease the Chinese government.

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The top holdings for PGJ include NIO, Alibaba, JD.com Inc, and TAL Education Group. The total expense ratio is 0.7 percent and short-sellers do hold stake.

The KraneShares MSCI China Clean Technology Index ETF (NYSEARCA:KGRN) is down 13.8 percent over the last month. The shares are at their lowest point since late 2020 following some periodic volatility with the fund's value. The ETF doesn't have as much historical data to go off of as PGJ. KGRN could see more consolidated volatility in the future.

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The top holdings for KGRN include NIO, Li Auto, Xpeng, and Conch Venture. The total expense ratio is higher at 0.79 percent, which means there are more fees involved in trading this fund (likely due to a more niche theme).

The Emerging Markets Internet & Ecommerce ETF (NYSEARCA:EMQQ) is another fund that's more focused within the Chinese tech space. The shares are down 22.38 percent over the last month, which puts them at a 12-month low.

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The top holdings for EMQQ include Alibaba, Tencent, Meituan, JD.com Inc, and Netease Inc. The expense ratio is rather high for this fund at 0.86 percent. Your decision on whether or not to invest will depend on your risk tolerance and willingness to pay additional fees.

Is now the right time to buy in to a Chinese tech ETF?

Expect the sector to sink more in the coming weeks and months. For now, it's likely best to keep Chinese tech ETFs on your watchlist, but keep it an active watch on a weekly basis. You might also want to keep track of futures, which could tell you when (and if) to pounce.

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