Chinese Tech Investments Spur Huge Returns for Pint-Sized ETF

(Bloomberg) -- Take China and technology, put them together, and what do you have? One of the best performing exchange-traded funds in the world.

The tiny $48 million Emerging Markets Internet and E-commerce ETF, or EMQQ, is up 32 percent this year, putting it among the 30 top returning equity ETFs worldwide. The fund is just a fraction of BlackRock Inc.'s $30 billion developing market fund, symbol EEM. But its performance is anything but diminutive.

How's it accomplishing this? By focusing on technology companies that generate most of their revenue from the developing world. Investors are flocking to tech stocks and sending emerging market shares to their best annual start in at least a decade, as they scale back expectations for spending and tax cuts under U.S. President Donald Trump.

Admittedly, this niche strategy could have fallen flat in the past. But for EMQQ, it's become the right idea at precisely the right time.

“This idea of ‘mash ups' — once in a while a product does it and it works out well,” said Eric Balchunas, a Bloomberg Intelligence analyst.

There are serious risks in banking on a small fund that's so heavily concentrated in a corner of China's tech sector. Many of the securities aren't particularly liquid, and the volatile nature of growth areas like technology and emerging markets means that the fund's fortunes could reverse quickly.

Still, the strategy is paying off for now as investors are piling into the fund. EMQQ, which charges a fee of 86 basis points, had never attracted more than $3 million of net inflows in a month until October, according to data compiled by Bloomberg. Since then, investors have added $24.1 million, the data show.

The ETF's biggest holding is Tencent Holdings Ltd., the Shenzhen, China-based operator of the blockbuster WeChat messaging service. It's second biggest is Alibaba Group Holding Ltd., China's largest e-commerce operator that's broadly seen as a barometer of the nation's consumer sentiment.

‘Secret Sauce'

EMQQ has 62 percent of its portfolio in Chinese companies, compared with 23 percent in the larger iShares MSCI Emerging Markets ETF.

“The secret sauce is China, and with EMQQ you're getting a triple dose,” Balchunas said.

Buyers are retail investors, advisers and ETF strategists, according to Kevin Carter, manager of the fund. “The emerging market consumer — that's a story that advisers have long understood,” he said.

Tech names have pushed the MSCI China Index near its highest level since 2015, according to data compiled by Bloomberg. Mark Mobius, executive chairman of Templeton Emerging Markets Group, argued in November that the threat of a trade war with Trump would compel China to accelerate the pace of opening up its markets.

Still, emerging market and tech investors can be fickle, as they've shown in the past by fleeing the assets as quickly as they've jumped in. After making his bullish call on onshore Chinese shares in November, Mobius called Chinese tech stocks “expensive” in an April 6 interview on Bloomberg TV.

“EM countries are going to be subject to macroeconomic commodity and currency forces, and China has some unique risks in its financial system,” Carter said. “But apart from those things, I think both groups have room to run.”

To contact the reporter on this story: Carolina Wilson in New York City at cwilson166@bloomberg.net.

To contact the editors responsible for this story: Jeremy Herron at jherron8@bloomberg.net, Eric J. Weiner, Dave Liedtka