While the U.S. boasts the Magnificent Seven stocks – some of the dominant tech companies shaping innovation today – China has its own group of powerhouse firms that mirror this trend. These companies, the China Dragons, have developed global footprints and enormous customer bases. Despite their influence, many U.S. investors may be unfamiliar with their business models and how they compare to American counterparts.
Here’s a closer look at these nine companies within the Roundhill China Dragons ETF (DRAG).
Known as the Amazon of China, Alibaba is a dominant player in e-commerce through its platforms Taobao and Tmall. Beyond retail, Alibaba has a diverse ecosystem including cloud computing (Alibaba Cloud), digital entertainment, and fintech (with its affiliate Ant Group, which operates Alipay). Alibaba's cloud business, much like AWS, powers a wide range of industries, and its logistics arm, Cainiao, facilitates global shipping. Though it competes with Amazon in e-commerce and cloud, its ecosystem integrates more deeply into consumers’ financial lives via Alipay, similar to PayPal but on a greater scale.
Often referred to as China's Tesla, BYD is a leader in electric vehicles (EVs) and renewable energy in China. The company produces a wide range of EVs, from sedans to buses, and is also heavily involved in battery production, rivaling companies like Tesla and Panasonic. Beyond vehicles, BYD develops solar power solutions and energy storage systems, contributing to its mission of green energy transformation. With growing exports and partnerships (including a recent collaboration with Toyota), BYD is emerging as a global EV competitor.
Comparable to Google, Baidu dominates the search engine market in China and is a leader in artificial intelligence (AI). Its search business generates substantial ad revenue, similar to Google’s model, but Baidu is increasingly pivoting towards AI and autonomous driving technology. Baidu’s Apollo platform is a key player in developing driverless cars, positioning the company as a potential global leader in the autonomous vehicle space. Its AI-powered services are rapidly expanding into areas such as healthcare and smart cities.
JD.com is one of China’s largest e-commerce platforms, focusing on first-party sales and logistics, much like Amazon. Known for its self-operated delivery network, JD ensures fast, reliable shipping and high product quality, giving it an edge over competitors. In addition to e-commerce, JD has expanded into areas like health tech (JD Health), fintech (JD Digits), and cloud computing. Its investment in logistics technology makes it a direct competitor to Amazon’s vast fulfillment network.
Meituan is China's largest food delivery and local services platform, comparable to DoorDash or Uber Eats, but with broader offerings. Meituan users can book hotels, purchase groceries, rent bikes, and buy movie tickets, positioning the app as a one-stop shop for daily needs. The company’s food delivery business is its largest revenue driver, but Meituan is increasingly focused on expanding its logistics and delivery network to cover more services, akin to a hybrid of Uber Eats and Yelp.
NetEase is a giant in the gaming and online entertainment sector, often likened to Activision Blizzard or Electronic Arts. Its titles like Westward Journey and Fantasy Westward Journey are popular in China, and it has partnered with global gaming giants to distribute games such as World of Warcraft. In addition to gaming, NetEase has expanded into education and music streaming through its NetEase Cloud Music service, which competes with Tencent Music. The company’s diverse portfolio and strong gaming presence make it a formidable player in China’s entertainment industry.
PDD Holdings is the parent company of the popular Chinese e-commerce platform Pinduoduo, which emphasizes group buying and discount shopping. In the U.S., PDD's subsidiary Temu has quickly gained traction by offering bargain-priced goods in an Amazon-style marketplace. Pinduoduo differs from traditional e-commerce by encouraging users to team up for better deals, creating a social, interactive experience. With a focus on lower-tier cities in China, PDD targets price-conscious consumers, much like a cross between Walmart and Groupon.
Tencent is one of the world’s largest gaming and social media companies. Best known for WeChat, China's ubiquitous messaging platform with over a billion users, it integrates social media, payments, shopping, and gaming all in one app – akin to a combination of WhatsApp, Facebook, and Venmo. Tencent also generates significant revenue from online gaming, with titles like Honor of Kings and PUBG Mobile. Much like Microsoft in the U.S., Tencent has a major stake in the gaming industry through its investments in companies like Epic Games, maker of battle royale game Fortnite, and Riot Games, known for League of Legends and Valorant. Additionally, its growing cloud services business mirrors Amazon Web Services (AWS).
Xiaomi started as a smartphone manufacturer but has since evolved into a broader consumer electronics brand, often compared to Apple. Its smartphones are popular in both China and global markets, but Xiaomi also has a significant footprint in the Internet of Things (IoT) with products like smart home devices, wearables (like its Mi Band), and AI-driven home appliances. While Apple focuses on the premium market, Xiaomi’s value proposition is affordability and innovation, making it popular in developing markets.
The China Dragons are reshaping industries in their home market and extending their influence globally. For U.S. investors familiar with the Magnificent Seven, understanding these companies’ business models and growth drivers may be key to recognizing their potential as long-term investment opportunities. Like their U.S. counterparts, these Chinese firms are at the forefront of technological innovation and consumer engagement on a massive scale.
The DRAG ETF offers exposure to some of China's leading technology and innovation companies. It allows investors to gain access to these tech giants, similar to how U.S. investors might view the Magnificent Seven stocks.
We believe there are a few use cases for DRAG.
Tactical trading: Given its focus on highly liquid Chinese equities, we believe DRAG may be suitable for trading around major events such as macroeconomic developments, industry news, or company earnings.
Long-term investing: DRAG seeks to provide investors with concentrated exposure to China's most innovative companies, which we believe are poised to benefit from the country's ongoing technological advancements.
Learn more about DRAG: https://www.roundhillinvestments.com/etf/drag/
Investors should consider the investment objectives, risks, charges, and expenses carefully before investing. For a prospectus or summary prospectus, if available, with this and other information about the Fund, please call 1-855-561-5728 or visit our website at www.roundhillinvestments.com/etf/DRAG. Read the prospectus or summary prospectus carefully before investing.
China Risk. The Fund’s significant investments in instruments that provide exposure to Chinese companies subject the Fund to risks specific to China. China may be subject to considerable degrees of economic, political and social instability. China is an emerging market and demonstrates significantly higher volatility from time to time in comparison to developed markets. Over the last few decades, the Chinese government has undertaken reform of economic and market practices and has expanded the sphere of private ownership of property in China. However, Chinese markets generally continue to experience inefficiency, volatility and pricing anomalies resulting from governmental influence, a lack of publicly available information and/or political and social instability.
Chinese companies are also subject to the risk that Chinese authorities can intervene in their operations and structure. Internal social unrest or confrontations with neighboring countries, including military conflicts in response to such events, may also disrupt economic development in China and result in a greater risk of currency fluctuations, currency non-convertibility, interest rate fluctuations and higher rates of inflation.
China has experienced security concerns, such as terrorism and strained international relations. Additionally, China is alleged to have participated in state-sponsored cyberattacks against foreign companies and foreign governments. Actual and threatened responses to such activity and strained international relations, including purchasing restrictions, sanctions, tariffs or cyberattacks on the Chinese government or Chinese companies, may impact China’s economy and Chinese issuers of securities in which the Fund invests. Incidents involving China’s or the region’s security may cause uncertainty in Chinese markets and may adversely affect the Chinese economy and the Fund’s investments. Export growth continues to be a major driver of China’s rapid economic growth. Reduction in spending on Chinese products and services, supply chain diversification, institution of additional tariffs or other trade barriers (including as a result of heightened trade tensions or a trade war between China and the U.S. or in response to actual or alleged Chinese cyber activity) or a downturn in any of the economies of China’s key trading partners may have an adverse impact on the Chinese economy. The Fund’s portfolio may include companies that are subject to economic or trade restrictions (but not investment restrictions) imposed by the U.S. or other governments due to national security, human rights or other concerns of such government. So long as these restrictions do not include restrictions on investments, the Fund is generally expected to invest in such companies.
Chinese companies are not subject to the same degree of regulatory requirements, accounting standards or auditor oversight as companies in more developed countries. As a result, information about the Chinese securities in which the Fund invests may be less reliable or complete. Chinese companies with securities listed on U.S. exchanges may be delisted if they do not meet U.S. accounting standards and auditor oversight requirements, which would significantly decrease the liquidity and value of the securities. There may be significant obstacles to obtaining information necessary for investigations into or litigation against Chinese companies, and shareholders may have limited legal remedies. Chinese companies may also be subject to significantly weaker recordkeeping requirements than the requirements imposed upon U.S. companies.
Market Risk. Market risk is the risk that a particular security, or Fund Shares in general, may fall in value. Securities are subject to market fluctuations caused by such factors as economic, political, regulatory or market developments, changes in interest rates and perceived trends in securities prices.
Derivatives Risk. The use of derivative instruments (i.e. swap agreements and forward contracts) involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional investments. These risks include: (i) the risk that the counterparty to a derivative transaction may not fulfill its contractual obligations; (ii) risk of mispricing or improper valuation; and (iii) the risk that changes in the value of the derivative may not correlate perfectly with the underlying asset.
Active Management Risk. The Fund is actively-managed and its performance reflects investment decisions that the Adviser and/or Sub-Adviser makes for the Fund.
Depositary Receipts Risk. Depositary receipts may be less liquid than the underlying shares in their primary trading market. Any distributions paid to the holders of depositary receipts are usually subject to a fee charged by the depositary. Holders of depositary receipts may have limited voting rights, and investment restrictions in certain countries.
Swap Agreements Risk. The Fund may utilize swap agreements to derive its exposure to one or more of the China Dragons. Swap agreements may involve greater risks than direct investment in securities as they may be leveraged and are subject to credit risk, counterparty risk and valuation risk.
Consumer Discretionary Sector Risk. Consumer discretionary companies, such as retailers, media companies and consumer services companies, provide non-essential goods and services. These companies manufacture products and provide discretionary services directly to the consumer, and the success of these companies is tied closely to the performance of the overall domestic and international economy, interest rates, competition and consumer confidence. Success depends heavily on disposable household income and consumer spending.
Information Technology Companies Risk. Information technology companies face intense competition, both domestically and internationally, which may have an adverse effect on profit margins. Like other technology companies, information technology companies may have limited product lines, markets, financial resources or personnel. The products of information technology companies may face obsolescence due to rapid technological developments, frequent new product introduction, unpredictable changes in growth rates and competition for the services of qualified personnel.
Large Capitalization Risk. Large capitalization companies may be less able than smaller capitalization companies to adapt to changing market conditions.
New Fund Risk. The Fund is a recently organized investment company with a limited operating history. As a result, prospective investors have a limited track record or history on which to base their investment decision.
Non-Diversification Risk. As a "non-diversified" fund, the Fund may hold a smaller number of portfolio securities than many other funds.
Concentration Risk. The Fund is concentrated in the industry or group of industries comprising the consumer discretionary sector and communication services sector.
Roundhill Financial Inc. serves as the investment advisor. The Funds are distributed by Foreside Fund Services, LLC which is not affiliated with Roundhill Financial Inc., U.S. Bank, or any of their affiliates.