Beware the Chinese Stock ETF Trap
Investors pouring billions into Chinese-stock ETFs have been warned: this strategy is a recipe for disaster. Despite short-term trading opportunities, these exchange-traded funds have consistently destroyed wealth over the long haul, making them one of the biggest losers among US ETFs.
A Decade of Devastating Losses
Over the past decade, Chinese ETFs have performed abysmally, ranking alongside the flagship fund of Cathie Wood, the onetime star money manager whose stock bets have faltered since the pandemic. According to data compiled by Bloomberg, these ETFs have produced the biggest erosion of asset value for US ETF investors.
Trading Vehicles, Not Investing Vehicles
Todd Sohn, an ETF strategist at Strategas, warns that Chinese ETFs are “trading vehicles, rather than investing vehicles.” He cautions that investors should be aware of the historically volatile Chinese equity market, which has a tendency to give back gains.
The KraneShares CSI China Internet Fund Debacle
The KraneShares CSI China Internet Fund (KWEB) has taken in over $12 billion since its inception in 2013, but its underlying value has deteriorated so much that the fund is now worth just $7.7 billion – almost $5 billion less than what investors put into it. This valuation gap trails only Wood’s ARK Innovation ETF (ARKK) among 415 of the largest US-listed stock ETFs.
Timing is Everything
The gap between accumulated inflows and assets in Chinese ETFs can be attributed to poor timing. These funds have exhibited wild swings, often tempting investors to pile in at the wrong time. Brendan Ahern, chief investment officer at Krane Funds Advisors LLC, notes that “timing China’s rebound and stimulus has been difficult, though investors’ patience is finally being rewarded.”
The Perils of Dip-Buying
A majority of KWEB’s inflows happened in 2021, when Chinese shares surged initially, only to plummet later. Dip-buying investors kept adding to KWEB, only to see holdings losing value further. That year, the ETF tumbled 52%, even as investors poured in a record $7.4 billion.
Fast Forward to Today
Beijing’s recent stimulus efforts have sparked a rally in Chinese shares, prompting record inflows into Chinese funds. However, the rally has already lost some steam, and China stocks remain one of the biggest laggards among global markets over more than a decade.
A Fear-of-Missing-Out Trade
Brent Donnelly, president of Spectra Markets, is skeptical that Beijing will do whatever it takes to salvage the economy and keep the stock rally going. He views the Chinese stock market rally as a “fear-of-missing-out trade,” where investors are chasing returns without considering the underlying risks.
Investors Beware
As investors continue to pour billions into Chinese-stock ETFs, they should be aware of the potential pitfalls. These funds have a history of destroying wealth, and timing the market correctly is crucial. Will investors be able to navigate the treacherous waters of Chinese stocks, or will they fall prey to the same mistakes of the past? Only time will tell.
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