Why the China Internet ETF Has Sort Of Endured Alibaba's Tumble

These days, finding exchange traded funds with significant China exposure, excluding inverse funds, that are shining is a taxing endeavor. Looking for “less bad” or “potential rebound” candidates is easier work and could yield some rewarding trading ideas.

The KraneShares CSI China Internet Fund KWEB fits in both of those categories. Down 6.6 percent year-to-date, KWEB is sporting a loss that is less than half that of the iShares China Large-Cap ETF FXI, the largest China ETF trading in the U.S. Additionally, KWEB's loss is also about half that of some of the noteworthy A-shares ETFs. 

KWEB's relative temerity in the face of tumbling Chinese equities is made all the more surprising when remembering this is one of the so called Alibaba Group Holding Ltd. BABA ETFs. In fact, KWEB was one of the first ETFs to add shares of the Chinese e-commerce following its September 2014 initial public offering and there was a time when Alibaba was the ETF's largest holding.

Shares of Alibaba have plunged nearly 36 percent this year and reside well below the IPO price. Even with that rapid erosion of market value, Alibaba is still KWEB's second-largest holding, commanding a weight of almost 10 percent in the fund.

One of the stocks, if not THE one, that has helped KWEB sort of keep its head above this water this year is JD.com Inc. JD. JD.com, not Alibaba, is the company that some market observers argue is China's most legitimate equivalent of Amazon.com Inc. AMZN.

Shares of JD.com have climbed nearly 12 percent this year as professional investors have been boosting exposure to the stock while dumping Alibaba.

“Hedge funds have boosted their ownership in JD.com to 18 percent as of the end of June from 1.2 percent in the third quarter of last year, according to data in public filings compiled by Bloomberg. They cut holdings in Alibaba by more than a third to about 3.1 percent during the period,” according to Bloomberg.

Simple math dictates this is still an unfortunate situation for KWEB because the ETF's 9.8 percent weight to Alibaba is more than 50 percent than larger than its JD.com allocation, though JD.com is the ETF's fifth-largest holding.

“China’s desire to increase domestic consumption led Premier Li Keqiang to announce the Internet Plus strategy on March 5th at the 2015 National People’s Congress Session. The new policy aims to drive economic growth by integrating internet technologies with traditional sectors and will focus on fostering new industries and business development, including ecommerce, industrial internet, and internet finance,” according to KraneShares research.

Those policies, at least in theory, should benefit plenty of KWEB holdings, but at the moment it is clear that Wall Street has a profound preference for JD.com over Alibaba.