China Etf: A Guide To Investing In The Dragon's Economy

Investing in China ETFs can be a great way to geographically diversify your portfolio. China ETFs are exchange-traded funds that track publicly listed Chinese companies, giving investors exposure to Chinese markets without having to directly purchase those stocks. The issuing company purchases the underlying asset (e.g. stocks, bonds, or currency), and investors purchase shares in the fund. As the underlying assets rise and fall, so does the value of your fund investment.

There are 12 indices on the Chinese stock market that are tracked by ETFs, including the CSI 300, FTSE China 30/18 Capped, FTSE China 50, and MSCI China. China ETFs can be found in various asset classes, including equity, fixed income, and currency.

When considering how to invest in China ETFs, it's important to do your due diligence and understand the key differences in share classes, underlying indexes, new ETF offerings, and complex fund structures. Additionally, there are different types of China ETFs to choose from, such as those focusing on the total China market, company size, or specific sectors like technology, healthcare, and real estate.

It's also important to consider the expense ratio, which is an annual fee paid out of your investments in the fund. Leveraged China ETFs and China exchange-traded notes (ETNs) are riskier options that use financial derivatives and borrowed cash to predict future prices.

Some popular China ETFs include iShares MSCI China ETF, KraneShares Bosera MSCI China A 50 Connect Index ETF, and Xtrackers Harvest CSI 300 China A-Shares ETF.

By investing in China ETFs, you can gain exposure to the world's second-largest economy and benefit from international diversification in your portfolio.

Best China ETFs

China exchange-traded funds (ETFs) are an appealing option for investors looking to diversify their portfolios geographically by investing in the world's second-largest economy. China ETFs track publicly listed Chinese companies, giving investors exposure to Chinese markets without needing to directly purchase those stocks.

IShares MSCI China ETF

This ETF tracks the MSCI China Index and generally invests at least 80% of its assets in the index's components. It had total assets of $488.02 million as of November 5, 2024.

Franklin FTSE China ETF

The Franklin FTSE China ETF seeks to provide investment results that correspond closely to the FTSE China RIC Capped Index. As of November 5, 2024, it had total assets of $111.63 million.

IShares China Large-Cap ETF

This ETF is one of the best-performing China equity ETFs, according to NerdWallet.

KraneShares CSI China Internet ETF

Also listed by NerdWallet as a top-performing China ETF.

Invesco China Technology ETF

Another top-performing China ETF, according to NerdWallet.

IShares MSCI China A ETF

This ETF seeks to track the investment results of the MSCI China A Inclusion Index, which is composed of domestic Chinese equities that trade on the Shanghai Stock Exchange. It had total assets of $275.32 million as of November 5, 2024.

Xtrackers Harvest CSI 300 China A-Shares ETF

This ETF seeks to track the CSI 300 Index, comprising 300 large- and mid-cap China A-Share stocks listed on the Shenzhen or Shanghai Stock Exchange. It is one of the oldest ETFs providing direct exposure to stocks on these exchanges. As of September 2, 2022, it had $1.7 billion in assets under management.

KraneShares Bosera MSCI China A 50 Connect Index ETF (KBA)

The KBA ETF targets the MSCI China A 50 Connect Index, which includes 50 large-cap stocks listed in Shanghai and Shenzhen. It includes some of China's largest and most liquid stocks that attract the most foreign interest and inflows. As of September 2, 2022, it had $611.4 million in assets under management.

China ETF investment process

Step 1: Understanding China ETFs

China exchange-traded funds (ETFs) allow investors to geographically diversify their portfolios by owning stakes in Chinese companies. China ETFs are funds that invest in China-based corporations, tracking publicly listed Chinese companies and giving investors exposure to Chinese markets without directly purchasing stocks.

Step 2: Different Types of China ETFs

There are three categories of Chinese stocks: A-stocks, B-stocks, and H-stocks. A-stocks are traded on the Shanghai or Shenzhen stock exchange in local currency and were previously exclusive to Chinese investors. However, foreign investors with special licenses can now invest in these stocks under certain restrictions. B-stocks are also traded on the Shanghai or Shenzhen stock exchange but in foreign currency and have been open to foreign investment. H-stocks are traded on the Hong Kong stock exchange in Hong Kong Dollars and are also open to foreign investment.

Step 3: Choosing a China ETF

When selecting a China ETF, it is important to conduct thorough due diligence. Key considerations include share classes, underlying indexes, new ETF offerings, and complex fund structures. The largest China ETF by assets under management is the iShares MSCI China ETF (MCHI). Other top-performing China ETFs include iShares MSCI China A ETF (CNYA), KraneShares Bosera MSCI China A 50 Connect Index ETF (KBA), and Xtrackers Harvest CSI 300 China A-Shares ETF (ASHR).

Step 4: Analyzing the ETF

When analyzing a China ETF, consider the type of ETF, the expense ratio, and the level of risk. China ETFs can focus on different areas, such as the total China market, company size, or specific sectors like technology, healthcare, or real estate. The expense ratio is an annual fee paid from your investments in the fund, so a lower ratio is preferable. Leveraged China ETFs and China exchange-traded notes (ETNs) are riskier options that use derivatives and borrowed cash to predict future prices.

Step 5: Purchasing the China ETF

To purchase a China ETF, you will need an online brokerage account, similar to buying company stock. Search for China ETFs on your broker's website and analyze them based on the criteria mentioned in Step 4.

Step 6: Monitoring and Adjusting

As with any investment, it is important to regularly monitor the performance of your China ETF holdings. Stay updated with the latest news and developments in the Chinese market and economy, as well as any changes to the underlying stocks or indexes tracked by your chosen ETFs. Adjust your investment strategy as necessary, considering factors such as performance, risk tolerance, and your financial goals.

China ETF risks

Investing in China ETFs carries a number of risks that investors should be aware of. Here are some key China ETF risks to consider:

Political and Regulatory Risks

China's unique political and economic system, with a communist government overseeing a capitalist economy, presents a set of risks. The government has significant control over the economy and can intervene in various ways that may impact the performance of Chinese stocks and ETFs. For example, the recent cancellation of the IPO of Ant Financial, which was set to be the world's largest, highlights the government's ability to disrupt companies' operations. This incident was reportedly influenced by company founder Jack Ma's criticism of Chinese bank regulators.

Additionally, geopolitical tensions, particularly between China and the United States, can affect the performance of China ETFs. Executive actions and trade policies, such as tariffs, imposed by the US government can create short-term volatility and impact the attractiveness of Chinese investments.

Accounting Transparency and Standards

Chinese accounting standards lag behind those of many other countries, making it challenging for investors to accurately assess the financial health and prospects of Chinese companies. This lack of transparency and lower standards can increase the risk of unexpected losses or negative surprises.

Performance and Volatility

While China's long-term growth prospects are strong, Chinese stocks and ETFs have experienced periods of poor performance. Over the last five years, the Shanghai Index has been down, and it is only marginally up over the past decade. This underperformance is notable given China's status as the world's fastest-growing major economy and the presence of well-known, dynamic companies.

Furthermore, China ETFs can be subject to high volatility. For example, funds focusing on China's internet and technology sectors, such as the Invesco China Technology ETF (CQQQ), experienced significant losses in 2018, underperforming traditional Chinese ETFs.

Delisting and Regulatory Compliance

Certain Chinese stocks have been delisted from US exchanges due to regulatory actions. An executive order signed by former US President Donald Trump banned US investors from investing in Chinese companies with alleged ties to the Chinese military. While there have been efforts to resolve these disputes, Chinese companies continue to face the risk of delisting from US exchanges, creating regulatory uncertainty for investors.

Impact of COVID-19 and Geopolitical Issues

The COVID-19 pandemic and ongoing geopolitical issues have impacted China's economic growth and recovery. While China's GDP grew by 8.1% in 2021 due to strong industrial production, concerns about COVID-19 and geopolitical tensions have hampered its recovery. In Q2 2022, China's GDP growth slowed to just 0.4%, and analysts estimate a full-year growth rate of 3.4%. This highlights the potential impact of external factors on China's economy and, by extension, the performance of China ETFs.

China ETF categories

China ETFs are exchange-traded funds that track publicly listed Chinese companies and give investors exposure to Chinese markets without having to directly purchase those stocks. There are 53 ETFs traded on US markets, with total assets under management of $25.88 billion. The average expense ratio is 0.69%.

China ETFs can be found in the following asset classes:

• Equity
• Fixed Income
• Currency

Some focus on the total China market, while others focus on company size or a particular sector, such as technology, healthcare, and real estate.

Equity ETFs

Equity ETFs are the most common type of China ETF and they invest in a range of Chinese stocks, from large-cap to small-cap companies. Some examples of equity ETFs include:

• IShares China Large-Cap ETF
• KraneShares CSI China Internet ETF
• Franklin FTSE China ETF
• IShares MSCI China ETF

Fixed Income ETFs

Fixed-income ETFs invest in Chinese bonds or debt securities. These ETFs provide exposure to the Chinese fixed-income market, which can offer stable and consistent returns.

Currency ETFs

Currency ETFs invest in the Chinese currency, the Renminbi (RMB), or other currencies that are heavily influenced by the Chinese economy. These ETFs can provide investors with exposure to the foreign exchange market and the potential for gains from currency appreciation.

Sector-Specific ETFs

Sector-specific ETFs focus on a particular industry or sector within China. For example, the KraneShares CSI China Internet ETF invests in Chinese companies that are primarily involved in the internet and technology sector. Other sector-specific ETFs may focus on healthcare, real estate, or consumer discretionary sectors.

Size-Specific ETFs

Size-specific ETFs focus on companies of a specific size, such as large-cap or small-cap. For example, the iShares MSCI China Large-Cap ETF invests in large-cap Chinese companies, while the KraneShares MSCI China All China Health Care Index ETF focuses on small-cap companies in the healthcare sector.

China ETF alternatives

China ETFs are exchange-traded funds that track publicly listed Chinese companies and give investors exposure to Chinese markets without having to directly purchase those stocks.

Invest in indices on Emerging Markets

Currently, you can invest in 3 emerging markets indices tracked by 23 ETFs. The total expense ratio (TER) of ETFs on emerging markets is between 0.11% p.a. and 0.74% p.a..

Invest in Asia indices

You can also invest in indices on Asia. There are 4 Asian indices, which are tracked by 10 ETFs. The total expense ratio (TER) of ETFs on Asian indices is between 0.20% p.a. and 0.74% p.a..

Diversify your portfolio geographically

If you are a US investor, you can diversify your portfolio geographically by investing in China ETFs. This way, you can get exposure to the world's second-largest economy.

Invest in broad market indices

The easiest way to invest in the whole Chinese stock market is to invest in a broad market index. This can be done at a low cost by using ETFs. There are 12 indices on the Chinese stock market that are tracked by ETFs.

Invest in China Region funds

China region stock portfolios invest almost exclusively in stocks from China, Taiwan, and Hong Kong. These portfolios invest at least 70% of their total assets in equities and at least 75% of their stock assets in one specific region or a combination of China, Taiwan, and/or Hong Kong.

• Franklin FTSE China ETF
• Franklin FTSE Taiwan ETF
• WisdomTree China ex-State-Owd Entpr ETF
• SPDR® S&P China ETF
• Invesco Golden Dragon China ETF
• IShares MSCI China A ETF
• Global X MSCI China Consumer Disc ETF

Frequently asked questions