1 ETF Beat the SPY by 272% in 2025. Here's Why It Can Do It Again in 2026

The KraneShares CSI China Internet ETF (KWEB) has significantly outperformed the SPDR S&P 500 ETF (SPY) year-to-date, returning 37.19% compared to SPY's 13.67%, driven by a strong rebound in Chinese tech stocks. This surge is attributed to a shift in Beijing's policy rhetoric towards "high-quality growth," positive earnings revision momentum, and the robust performance of key holdings like Alibaba (+94.7% YTD) and Tencent (+51.8% YTD), both benefiting from AI integration and revenue growth. With Chinese tech companies making strides in AI and chipmaking, KWEB is positioned for potential continued gains into 2026, presenting an attractive satellite holding.

Analysis

The KraneShares CSI China Internet ETF (KWEB) has significantly outperformed the SPDR S&P 500 ETF (SPY) year-to-date, posting a 37.19% return compared to SPY's 13.67%. This substantial 272% difference is driven by a strong rebound in Chinese tech stocks, which had underperformed since 2022. Key catalysts include a shift in Beijing's policy rhetoric towards "high-quality growth" and positive earnings revision momentum. Additionally, the greenback's slow grind lower against a basket of trading partners is eroding the real return of purely domestic portfolios, making international exposure more attractive.

KWEB's strong performance is underpinned by its major holdings, particularly Alibaba (BABA) and Tencent Holdings (TCEHY). Alibaba, KWEB's largest holding at 11.03%, is up 94.7% YTD, reporting 13.1% year-over-year revenue growth and 9.26% margin growth in the June quarter, largely due to AI integration and renewed growth. Tencent, comprising 10.84% of the fund and up 51.8% YTD, has benefited from AI-driven targeted advertising and gaming, with international gaming sales growing 35%.

The outlook for KWEB remains optimistic, with expectations for continued gains into 2026 as Chinese tech companies advance in chip self-sufficiency and AI model development. Chinese AI models are noted for climbing benchmarks at a fraction of the cost, and CEO Jensen Huang suggests Chinese chipmaking is "nanoseconds behind" the U.S. Despite ongoing tariffs, the ETF's valuation is considered attractive for a satellite holding, offering diversification away from heavily overlapped U.S. tech exposure.

Key Decisions for Investors

• Investors should consider KWEB as a strategic satellite holding to diversify portfolios and capture potential growth from rebounding Chinese internet and AI sectors, given its 37.19% YTD return significantly outperforming SPY.
• Monitor key fundamental drivers including the sustained positive earnings revision momentum, Beijing's "high-quality growth" policy rhetoric, and the continued advancements in AI and chipmaking capabilities by Chinese tech firms.
• While the valuation is attractive, investors should remain vigilant regarding geopolitical risks, including ongoing tariff implications and potential shifts in U.S.-China relations, which could impact the long-term outlook for Chinese equities.