How to Get Tactical in One of the World's Most Vibrant Consumer Markets

Conventional, broad-based index funds and exchange traded funds are excellent tools for advisors to deploy in myriad client portfolios. Due to massive fee compression over the year, these products are cheap, meaning advisors and their clients are ahead of the game when it comes to the adverse effects of costs on total returns.

Of course, the rub is many of these funds simply “do what the market does” less the expense ratio. In other words, it's a fine idea for advisor to engage in conversations with clients regarding tactical ideas – something that's likely already appealing to or in the minds of more risk-tolerant clients.

Many ETFs provide solid foundations for tactical, thematic exposure, including with both domestic and international equities. One of the more compelling, longer-ranging ideas in this arena is the Chinese consumer, a concept accessible via several exchange traded funds, including the KraneShares CICC China Consumer Leaders Index ETF (NYSEARCA:KBUY).

KBUY is about two months and already has nearly $51 million in assets under management – a fast, impressive start for any ETF, particularly one with the thematic label. Good news: Fundamental soundness outweighs the hype because total retail sales in China in 2019 reached $5.8 trillion, topping the $5.5 trillion notched here in the U.S.

Why KBUY Is Relevant

When it comes to accessing the Chinese consumers, many advisors, and their clients for that matter, are already familiar with internet giants such as Alibaba, and others. Those are story stocks with stellar long-term track records, but there's more to the story in the world's second-largest economy,

KBUY tracks the CICC China Consumer Leaders Index. That benchmark “consists of the investable universe of publicly traded China-based companies whose primary business or businesses are in the consumption-related industries such as home appliance, food & beverage, apparel & clothing, hotels, restaurants, and duty-free goods,” according to KraneShares.

Translation: KBUY hits on the more basic, everyday side of the Chinese consumer investment thesis while legacy funds in this category are heavily reliant on the discretionary, indulgence side of the equation. While many of its components are integral to everyday life in China, KBUY sits at the intersection of some alluring growth themes.

“We are also seeing how rising incomes in China have contributed to an overall consumption upgrade, consisting of a stronger preference for high-quality products, brand loyalty, and more luxury spending,” says KraneShares' Brendan Ahern. “New technology infrastructure, such as mobile payments, big data, artificial intelligence (AI), and cloud computing, is significantly enhancing the shopping experience, making it much more convenient and efficient as well as enabling companies to reach much larger audiences.”

KBUY Key Performance Indicators

An ETF such as KBUY is going to be a satellite position in most portfolios, but that status doesn't diminish its potential as a possible alpha generator for risk-tolerant clients. Advisors can guide clients through an allocation with KBUY by noting that not only are Chinese middle class incomes surging, but many of the companies in this ETF – though they aren't familiar to U.S. investors – hold dominant market share in their home market.

For spirits maker Kweichow Mouta – almost 9% of the KBUY roster – isn't just the largest liquor company in the world by market, it carries an aura of prestige. Think of it like the Hermes or Tiffany of Chinese liquor. These days, its products are expensive, hard to find and bought by many consumers as investments.

That's just one example of the competitive moats enjoyed by many Chinese consumer firms and that's a point in favor of KBUY.

“The purchasing power of China’s population of 1.4 billion people is simply tremendous. We believe that that purchasing power provides a strong investment case for owning the companies whose products are being purchased by China’s population,” according to KraneShares research.

Related: Netflix and Chill Isn't Just for Friday Night. A New ETF Says It's for Investors, Too.

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