China Internet ETF Roars Back

Granted, the earnings bar was set low. The stock is still in the doldrums year-to-date and much of the gains seen earlier today have evaporated, but shares of Alibaba Group Holding Ltd (NYSE:BABA) are higher by about 3 percent at this writing.

The Chinese e-commerce giant reported third-quarter earnings of three cents per share on a modest revenue beat. With enthusiasm for Alibaba's earnings waning, the KraneShares CSI China Internet Fund (KraneShares Trust (NASDAQ:KWEB)), one of the exchange-traded funds with the largest weight to Alibaba, is trading slightly lower at this writing.

Look Again At KWEB

However, the KraneShares CSI China Internet Fund is deserving of investors' attention. At least it certainly was several weeks ago. KWEB has been crushing the iShares FTSE/Xinhua China 25 Index (ETF) (NYSE:FXI), the largest U.S.-listed China ETF, over the past several weeks.

There were a couple of interesting observations worth mentioning in the last few days that has started to impact a key relative strategy that is, 'new' is outperforming 'old' China. Put another way, the internet just started beating out fixed asset investment again, said Rareview Macro founder Neil Azous in a note out Tuesday.

Over the past month, KWEB has surged a jaw-dropping 23.6 percent, buoyed in large part by a 36.6 percent by Alibaba. Jack Ma's company is KWEB's third largest holding at a weight of over 9 percent. As Azous noted, new China, in this case technology and Internet fare, is crushing old China, in this case FXI, an ETF that devotes over 52 percent of its weight to controversial Chinese banks.

During the same period in which KWEB is up 23.6 percent, FXI's 13.3 percent gain almost seems paltry. The NASDAQ Composite, the exchange where many of KWEB's U.S.-listed holdings trade, is up just 10.8 percent over that period.

There are fundamental catalysts behind KWEB's recent resurgence.

Catalysts At Play

Online sales of consumer goods accounted for 9.8 percent of all consumer goods sold in China from January through August this year, a 33 percent increase year-over-year. We believe the China internet sector represents one of the most attractive segments of the 'new China' economy, said KraneShares in a recent note.

Azous added that online travel companies are receiving increased attention from investors, highlighting Priceline Group Inc (NASDAQ:PCLN)'s recent ascent to an all-time high as an example. He also noted that China's Ctrip.com International, Ltd. (ADR) (NASDAQ:CTRP) has agreed to a share swap with Qunar Cayman Islands Ltd (NASDAQ:QUNR) to create China's largest online travel company with Chinese Internet search giant Baidu Inc (ADR) (NASDAQ:BIDU) coming out with a 25 percent stake in Ctrip.

Ctrip, Baidu and Qunar combine for over 19 percent of KWEB's weight.

And lest we forget: On December 1, MSCI will begin including Chinese companies whose primary listings are outside of China (think Alibaba and Baidu) in its international equity benchmarks, which could provide another short-term spark for KWEB.