KWEB ETF Outperforms SPY by 272% – Can It Repeat in 2026?

The SPDR S&P 500 ETF (SPY), while posting respectable double-digit gains for the third consecutive year in 2025, has been dramatically outperformed by the KraneShares CSI China Internet ETF (KWEB). As of this writing, SPY has returned 13.67% year-to-date, whereas KWEB has surged 37.19% year-to-date, representing a 272% performance difference. This stark contrast highlights the value of looking beyond traditional U.S. market exposure for portfolio enhancement.

Unlike popular tech-focused alternatives like the Invesco QQQ Trust (QQQ), which shares significant overlap with SPY’s top holdings, KWEB offers exposure to a completely different set of stocks. While Nvidia (NVDA) constitutes nearly 8% of the S&P 500 and 9.87% of QQQ, KWEB’s portfolio consists primarily of Chinese internet companies that have minimal correlation with U.S. market leaders. This diversification benefit has proven particularly valuable in 2025 as Chinese tech stocks catch up after years of underperformance.

The remarkable turnaround in Chinese tech stocks stems from multiple converging factors. Earnings revision momentum has turned positive, and policy rhetoric from Beijing has shifted from regulatory crackdowns to promoting ‘high-quality growth.’ This policy pivot creates a more favorable environment for technology companies after several challenging years.

Fundamentally, Chinese technology companies are making significant strides in artificial intelligence development. Nvidia CEO Jensen Huang noted that Chinese chipmaking is ‘nanoseconds behind’ the U.S., while Chinese AI models have been continuously climbing performance benchmarks at a fraction of the development cost. As AI becomes increasingly central to company valuations, investors are applying higher premiums to Chinese tech stocks that demonstrate competitive AI capabilities.

The weakening U.S. dollar against a basket of trading partners has also eroded the real return of purely domestic portfolios, making international exposure through ETFs like KWEB increasingly attractive for U.S. investors seeking to diversify currency risk.

Alibaba (BABA), KWEB’s largest holding at 11.03% of the fund, has surged 94.7% year-to-date after years of sluggish returns. The company’s growth has accelerated significantly, with revenue growing 13.1% year-over-year in the June quarter and margins expanding by 9.26%. The return of founder Jack Ma earlier this year and the company’s aggressive competition in AI development have contributed to renewed investor confidence. Notably, open models from Alibaba are now rated higher than those from American companies like OpenAI and Meta according to The Washington Post.

Tencent Holdings (TCEHY), the second-largest holding at 10.84% of the fund, has gained 51.8% year-to-date. The company has benefited substantially from AI-driven targeted advertising and automated ad creation capabilities. In gaming, Tencent has enhanced experiences with Hunyuan-powered NPCs and AI-assisted content, driving international gaming sales growth of 35% and domestic gaming sales growth of 17%.

PDD Holdings (PDD), constituting 7.58% of KWEB, has bucked broader trends with a 31.6% year-to-date gain. The company has navigated U.S. tariff challenges effectively, with its domestic e-commerce platform Pinduoduo continuing to supply the vast majority of revenue despite international trade tensions.

The setup for continued KWEB outperformance in 2026 appears favorable, mirroring conditions that preceded this year’s substantial edge over SPY. Chinese tech companies continue to make up lost ground after years of underperformance, with chipmakers aggressively pursuing silicon self-sufficiency and AI models progressively improving.

Growth, which was the primary concern for Chinese tech companies two years ago, has returned as AI begins driving double-digit revenue increases. As AI becomes a more significant factor in company valuation, investors are willing to pay higher premiums for companies demonstrating competitive AI capabilities. The current valuation of KWEB holdings remains attractive for a satellite position in a diversified portfolio.

While tariffs haven’t disappeared and geopolitical tensions persist, the fundamental improvements in Chinese technology companies’ competitive positioning, particularly in AI development, suggest that the forces powering KWEB’s 2025 outperformance could remain in place through 2026. For investors seeking diversification beyond traditional U.S. market exposure, KWEB represents a compelling satellite holding with potential for continued strong performance.