These ETFs are birds of a feather.
David Tepper was in selling mode in the second quarter of 2024. The billionaire reduced stakes in eight of his Appaloosa hedge fund’s top 10 holdings.
However, Tepper didn’t only sell in Q2. He bought several stocks. The successful hedge fund manager also increased Appaloosa’s positions in two exchange-traded funds (ETFs).
iShares China Large-Cap ETF
Tepper bought 565,000 shares of the iShares China Large-Cap ETF (FXI 1.57%) last quarter, boosting Appaloosa’s stake in the ETF by 9%. The iShares fund now ranks as the 10th-largest holding in Appaloosa’s portfolio.
BlackRock launched this ETF on Oct. 5, 2004. It tracks the FTSE China 50 index, which includes the stocks of the 50 largest companies based in China. The fund’s top holding, Alibaba, makes up roughly 10% of its assets. Interestingly, Alibaba is also Appaloosa’s top holding, but Tepper sold 6.7% of the hedge fund’s stake in the Chinese internet company in Q2.
The iShares China Large-Cap ETF has delivered negative total returns in recent years, although it’s up some in 2024. Why did Tepper decide to invest in it in Q2? Valuation was perhaps a top consideration. The average price-to-earnings ratio for stocks in the ETF is only 11.5.
This isn’t a low-cost ETF. Its annual expense ratio is 0.74%. The good news for Tepper, though, is that the iShares fund’s dividends more than offset the expenses with its 30-day SEC yield topping 2.7%.
KraneShares CSI China Internet ETF
You might say that Tepper was “a bull in the China shop” in Q2. The other ETF he loaded up on during the quarter was the KraneShares CSI China Internet ETF (KWEB 0.88%). Tepper increased Appaloosa’s stake in the ETF by 29%.
This fund tracks the CSI Overseas China Internet Index, which features the stocks of companies based in China that primarily focus on internet-related technology. Two of the KraneShares ETF’s top 10 holdings are also in Appaloosa’s top 10 — Alibaba and PDD Holdings.
Like the iShares China Large-Cap ETF, the KraneShares CSI China Internet ETF hasn’t performed well in recent years. Since its inception on July 31, 2013, the fund has delivered an annualized average return of below 2%.
Another common denominator this ETF shares with the iShares fund is its relatively high costs. The KraneShares ETF’s annual expense ratio is 0.7%.
Should you buy these ETFs, too?
These two ETFs aren’t great picks for most investors, in my view. There are inherent risks associated with buying Chinese stocks and ETFs. In particular, the Chinese government has cracked down on large internet companies in recent years. Some think the negative effects will last for a long time to come.
However, more aggressive investors could find the attractive valuations of Chinese stocks too appealing to ignore. Should these investors buy the iShares China Large-Cap ETF and KraneShares CSI China Internet ETF as Tepper did in Q2? Again, I don’t think so.
The better approach for these investors could be to buy the specific Chinese stocks that are the strongest financially and have the best growth prospects. This would allow aggressive investors to profit from a potential rebound while not paying the lofty expenses associated with the two ETFs.
Which stocks are the best picks with this strategy? I think there’s a good case to be made for Alibaba — even though it was among the many stocks Tepper sold in Q2.