CWEB: Extensive bullish performance likely to continue (NYSEARCA: CWEB)

investment thesis

KWEB and CWEB returned 96.36% and 245.09% in the 65 trading days between 10/24/2022 and 1/26/2023. The chart below shows that these massive returns were made without any major sell-offs.

I expect this recovery to continue And it can continue, now and then with modest corrections, for at least half a year. Therefore, I would classify both funds as Buy. The choice between KWEB and CWEB depends mostly on the investor’s risk tolerance, those with a low risk tolerance should invest in the non-leveraged KWEB fund, while the more daring may go with CWEB. Everyone is supposed to use strong risk management strategies because these funds are highly volatile.

To estimate the risks involved, one can look at the following chart, which shows a very long downtrend for about two years, from 2/22/2021 to 10/24/2022. During this break KWEB and CWEB It returned -79.33% and -97.78%, respectively. To recover from these devastating losses, KWEB would need to gain 484%, while CWEB would need 4,504%.

While these numbers are huge, they should not scare away investors who are experienced in the way markets work. If anything, we all read the mantra that “leverage” is dangerous and leveraged funds are just day trading tools, only suitable for hedge fund professionals and professional traders. This is a myth to be demolished with a simple excuse.

Both charts show that the consistency and strength of the trends presented great opportunities for long-term trading. The CWEB buy transaction that commenced on 10/24/2022 would have gained 245%. This is more than double the 96% return of KWEB. This is a good example of the fact that in steady upward trends, leveraged funds multiply additional gains, on top of the leverage factor.

A similar argument can be made for downtrends, but I won’t dwell on it, because this article is for longtime investors only. Hedge fund professionals know very well how to profit by shorting the markets.

KWEB Fund data

Founding date: 7/31/2013

Net assets: 6.5 billion

Yield: 0.44%

Expense ratio: 0.69%

Top 10 holdings as of 2023-1-25

Tencent Holdings Limited 10.88%

Alibaba Group Holding Co., Ltd. common shares 9.75%

Mitoane Class B 7.23%

JD.com Inc – Common Stock – Class A 5.98%

Pinduoduo Inc ADR 5.80%

NetEase Inc – common stock 4.43%

Tencent Music Entertainment ADR Group 4.09%

Kanzhun Ltd ADR 4.00%

Trip.com Group Ltd 3.96%

KE Holdings Inc ADR 3.93%

Number of holdings: 34 as of 2023-01-25

KWEB Rating

All stocks on KWEB have low valuations. The weighted average of book price, sales and cash flows is much lower than comparable US stock prices.

Price/book = 4.29

Price/Sales = 0.55

Price/cash flow = 23.65

Technical Analysis

The weekly price charts for KWEB and CWEB are identical twins. The high was in February 2021 and the trough was in October 2022.

The KWEB chart shows a 10-week “bullish” crossover with the 40-week moving average sometime in the last week of December. The same pattern happened about two weeks later at CWEB.

Both charts indicate a strong uptrend, which I think is likely to continue.

Next is the “relative rotation graph” from KWEB, CWEB and TCEHY, BIDU. It shows the fact that the outperformance of Chinese Internet stocks is in full swing and has a strong momentum.

Both boxes have options. KWEB has LEAP options after two years, through January 2025. The market for CWEB options is very limited with the longest expiration date at six months, until July 2023.

Cautionary notes

These notes address the additional risks associated with trading leveraged assets, such as CWEB.

First, this is a statement from FINRA about trading in inverse and leveraged funds.

“Due to the effects of makeup, her performance over longer periods of time can vary greatly from her stated daily goal. Therefore, inverse, leveraged ETFs that reset daily are usually not suitable for retail investors who plan to hold them for longer than a single trading session, especially in volatile markets.“

Regulatory Notice 09-31 | FINRA.org

The following chart shows the erosion of value that occurs when leveraged funds are held for a long time. While KWEB has returned 6.54% in the past 12 months, the 2X CWEB Leveraged Fund has returned -32.57%, which is a significant loss.

conclusion

CWEB and KWEB reviews are BUY.

Both funds are highly volatile and require strong risk protection measures.

As a leveraged fund, CWEB is not suitable as a long-term investment and is only recommended as a short-term tactical investment. Long-term investors should use the non-leveraging KWEB fund.

Editor’s note: This article discusses one or more securities that are not traded on a major US stock exchange. Please be aware of the risks associated with these stocks.