'China dragons' ETF takes flight on Wall Street

A new exchange-traded fund looking to capture the performance of China’s biggest companies is launching Thursday, just as the nation’s stocks officially enter a bull market following a sweeping stimulus package.

The Roundhill China Dragons ETF (ticker DRAG) tracks an equal-weighted basket of five to 10 of the largest and most innovative Chinese tech companies that the issuer collectively dubs the “China Dragons.” 

To date, members include Tencent Holdings Ltd, PDD Holdings Inc, Alibaba Group Holding, Meituan, BYD Co Ltd, Xiaomi Corp, JD.com Inc, Baidu Inc and NetEase Inc. 

As of launch, the nine mega-cap tech firms, in aggregate, exhibit competitive advantages through the economies of scale, solid fundamentals and impressive growth relative to their peers, according to Roundhill Investments. The ETF will be rebalanced quarterly.

What differentiates DRAG from other ETFs that offer China exposure — such as the $7.9 billion KraneShares CSI China Internet ETF (KWEB) and the $6.4 billion iShares China Large-Cap ETF (FXI) — is its concentration, said Dave Mazza, the firm’s chief executive officer. 

DRAG, at 59 basis points, also has a slightly lower fee compared to most of its peers in the same category.

The four largest China-linked ETFs have altogether amassed $2.5 billion this week alone, with KraneShares’ KWEB seeing its biggest daily inflow on record Tuesday. 

Chinese equities rallied at one point this week to their best day since 2008 after Beijing unleashed a range of measures to turbo-charge the growth of an ailing economy. Money managers and hedge funds have rushed to pile into Chinese stocks at a record pace after years of underexposure.

“We are seeing people trickle back into emerging markets,” said Mohit Bajaj, director of ETFs at WallachBeth Capital. “So if the belief that China will continue performing the way it does, the ETF could do well.”

Among its roster of nearly 20 ETFs, Roundhill’s best performer is its $780 million Roundhill Magnificent Seven ETF (MAGS), which tracks the Magnificent Seven stocks. Mazza sees this as the US version of DRAG. Up 40% this year, it was launched in April 2023.