U.S. tech equities driven by the artificial intelligence (AI) theme have been a prime catalyst for market gains this year. Have valuations exceeded their underlying fundamentals? If so, one potential avenue to diversify tech exposure is the Invesco China Technology ETF (CQQQ).
The fund tracks the FTSE China Incl A 25% Technology Capped Index. That index includes constituents of the FTSE China Index and FTSE China A Stock Connect Index. As such, it includes China A-shares as well as China B-shares within the movers and shakers of China’s tech sector.
Hardware-Focused, Macroeconomically Insulated
AI technology will require the requisite buildout of infrastructure to support the technology itself. Ultimately, that means having the necessary hardware in place. Furthermore, China has committed to lofty ambitions aimed at bolstering its technological capabilities in AI in order to reduce reliance on other nations for tech hardware such as semiconductors. This is an area where CQQQ finds opportunities.
“I think what’s unique about this ETF is that it gives you exposure to many of these China technology companies focusing on hardware that we just don’t see in some of the other portfolios,” said Rene Reyna, head of thematic and specialty product strategy at Invesco, in an interview with TMX VettaFi. Reyna noted that “the growth opportunity is going to be on the hardware side just because of China’s commitment.”
Another strength of CQQQ is that it’s well-insulated from the macroeconomic headwinds facing China. The country continues to deal with the after-effects of a real estate development crisis four years ago despite government efforts to inject stimulus measures to resuscitate its economy. Nonetheless, the fundamental outlook supports growth in the long-term investment horizon despite the tariff spats with the United States.
“By focusing your exposure to China tech, the insulation there is that you’re less susceptible to some of these structural challenges like the property market that they’re still trying to sort out,” Reyna said.
