Market Overview

This China Internet ETF Is On A Roll

This China Internet ETF Is On A Roll

With some help from the e-commerce boom, which itself is benefiting from the coronavirus pandemic, internet exchange-traded funds are soaring this year.

What Happened

That theme isn't confined to U.S borders as some of this year's best-performing emerging markets ETFs are heavy on e-commerce and online retail fare. On the geared side of the ledger, there's the high-flying Direxion Daily CSI China Internet Index Bull 2X Shares (NYSE: CWEB).

CWEB, which looks to deliver double the daily returns of the CSI Overseas China Internet Index, jumped 4.26% on Wednesday on above-average volume, extending its one-week gain to almost 16%. No, leveraged ETFs shouldn't be held for more than a few days, but CWEB's 90-day return of almost 120% is sure to attract some traders.

Why It's Important

Recently bullishness in the only leveraged ETF focusing on Chinese internet stocks is built on solid fundamentals, plenty of which stem from the pandemic.

“The performance differential between online and offline retail in China has been stark during the coronavirus pandemic, with e-tail sales of goods continuing to rise even as total retail sales have fallen,” said Fitch Ratings in a recent note.

Data support the notion as in the U.S., Chinese e-commerce giants are benefiting from shutdowns, but there's also reason to believe this trend will prove durable, meaning CWEB bears monitoring over the remainder of 2020.

“Official lockdowns and public fears about exposure to the coronavirus favoured online retailers and contributed to weaker footfall at shopping locations in the first half of the year. However, e-tailing has continued to outperform even as overall consumer spending has recovered,” according to Fitch.

What's Next

CWEB's underlying index allocates over 18% of its combined weight to Tencent Holdings (OTC: TCEHY) and Alibaba (NYSE: BABA), but other components are benefiting from China's shift to online retail.

“The trend should provide underlying support for the ratings of companies that are able to engage with and benefit from the shift towards online retail,” said Fitch. “For example, home appliance producer Midea Group maintained a compound average annual growth in online sales of over 42% during 2016-2019, with online sales accounting for 25% of its total in 2019. This has provided support to its revenue growth, market share and cash flow.”

Roughly 39% of CWEB's index's holdings are dedicated online retailers while close to another 40% have leverage to the shelter-in-place trade.


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