A new ETF is offering exposure to e-commerce and internet companies in developing markets with a very noticeable exception: China.
The FMQQ The Next Frontier Internet & Ecommerce ETF (FMQQ) debuted on the NYSE Arca Tuesday with an expense ratio of 0.86%. It shares plenty with its sister fund, the $1.28 billion Emerging Markets Internet & Ecommerce ETF (EMQQ): Both ETFs charge the same expense ratio, use custom indexes tracking about 40 countries and track e-commerce firms in developing markets.
However, FMQQ completely cuts out Chinese companies on U.S. exchanges and abroad, including major tech companies like Tencent, Meituan, Pinduoduo, Alibaba and JD.com, that account for about 28% of EMQQ’s holdings.
The initial filing for FMQQ was made on July 16, just weeks after Chinese authorities ordered a crackdown on ride-hailing app Didi and other tech giants in the country. Beijing instituted several other curbs on major industries in the weeks that followed as part of a social and economic restructuring effort, ranging from banning children from playing video games during the school week to banning tutoring companies from making profits.
EMQQ Chief Investment Officer Kevin Carter said the timing was a coincidence and the fund had been in the works since early 2021. At that time, investors were already asking him about the fund’s nearly two-thirds concentration in Chinese companies, and the possibility of small and midcap company exposure outside of the country.
“Obviously the interest in a non-China product spiked pretty significantly in July, and we regretted that we didn't launch it earlier or register it earlier,” he said. “But we didn't start working on this or decide it was a good idea just because of what was going on in China.”
He noted that e-commerce penetration in China sits around 25%, while that figure sits at approximately 5% in countries like India, Brazil and Nigeria. With those figures, Carter believes the growth opportunities could be rapid, particularly with a number of e-commerce firms across the world filing for initial public offerings.
Cutting out the Chinese tech sector could eliminate a severe drag on FMQQ’s performance. Consider the KraneShares CSI China Internet ETF (KWEB), a China tech thematic fund. EMQQ and KWEB have moved in tandem over the past year, including to return highs in February.
However, EMQQ is just under flat over the course of a year, while KWEB is down more than 28%.
Carter argued that China's crackdown isn't as bad for long-term investment prospects as other claim because other countries are trying to regulate major tech companies, including FAANG stocks in the U.S. and the European Union. While he said China's rollout of those regulations were "clumsy", they ended up producing a buy opportunity.
"Buy fear. Valuations are quite reasonable," he said.