Best China-Focused Etf Funds: Smart Investment Options

China exchange-traded funds (ETFs) are a way for investors to geographically diversify their portfolios by investing in stocks of companies domiciled in China. China ETFs are especially appealing as they offer exposure to the world's second-largest economy. There are 17 China ETFs traded in the US, excluding inverse and leveraged ETFs, and funds with less than $50 million in assets under management (AUM). The top three China ETFs by one-year trailing total returns are 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).

China ETFs for US investors

China ETFs (exchange-traded funds) are a way for investors to geographically diversify their portfolios by investing in a basket of companies based in the world's second-largest economy. There are 17 China ETFs that trade in the United States, excluding inverse and leveraged ETFs as well as funds with less than $50 million in assets under management (AUM).

• IShares China Large-Cap ETF
• KraneShares CSI China Internet ETF
• IShares MSCI China ETF
• Xtrackers Harvest CSI 300 China A-Shares ETF
• Invesco China Technology ETF
• WisdomTree China ex-State-Owned Enterprises Fund
• IShares MSCI China A ETF
• Global X MSCI China Consumer Discretionary ETF
• KraneShares Bosera MSCI China A 50 Connect Index ETF
• Invesco Golden Dragon China ETF
• Franklin FTSE China ETF
• KraneShares China Internet and Covered Call Strategy ETF
• KraneShares MSCI China Clean Technology Index ETF
• KraneShares MSCI All China Health Care Index ETF
• Matthews China Active ETF
• Xtrackers Harvest CSI 500 China A-Shares Small Cap ETF
• KraneShares SSE Star Market 50 Index ETF
• Rayliant Quantamental China Equity ETF

When choosing a China ETF to invest in, it is important to analyze the type of ETF, the expense ratio, and whether it is a leveraged ETF or an exchange-traded note (ETN), which carry more risk.

China ETF investment risks

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

• Geopolitical Risks: China's complex geopolitical landscape poses risks for investors. Historical tensions between the US and China have resulted in executive orders and policies that impact investment opportunities. For example, in 2020, an executive order by then-US President Donald Trump banned US investors from investing in Chinese companies with alleged ties to the Chinese military, leading to the delisting of certain Chinese stocks from US exchanges. While the current administration is reviewing these policies, Chinese companies continue to face the risk of delisting, creating uncertainty for investors.
• Economic Growth and Market Performance: China's economic growth has been impacted by factors such as the COVID-19 pandemic and geopolitical issues. In 2020, China's GDP growth rate was 2.3%, the lowest in decades. While there was a sharp rebound in 2021, ongoing concerns and disruptions have affected the recovery. Chinese equities have underperformed the US stock market in the past year, and investors should carefully assess the potential for underperformance relative to other markets.
• Regulatory and Compliance Risks: Regulatory differences between China and other countries, particularly the US, introduce risks for investors. Chinese companies listed on US exchanges face scrutiny and potential delisting if they do not comply with US regulatory requirements, especially regarding audit inspections and financial disclosures. This creates a level of uncertainty for investors, as non-compliance can lead to unexpected losses or reduced investment opportunities.
• Currency and Liquidity Risks: Currency fluctuations and liquidity issues can impact the performance of China ETFs. Chinese stocks are traded in various currencies, including the local currency (Renminbi) and the Hong Kong Dollar (for H-shares). Currency fluctuations can affect the value of investments and impact investment returns. Additionally, liquidity issues, such as those faced by B-shares due to changing restrictions, can impact an investor's ability to easily buy or sell holdings.
• Sector and Company-Specific Risks: China ETFs often focus on specific sectors or company sizes, such as technology, healthcare, or real estate. Investing in these ETFs carries the risk of sector-specific downturns or company-specific issues. For example, an ETF heavily invested in technology stocks may be vulnerable to technological disruptions or regulatory changes impacting that industry. It is important for investors to diversify their holdings to mitigate these risks.
• Country-Specific Risks: Investing in any single country, including China, carries specific risks. Country-specific risks can include political instability, economic policy changes, natural disasters, or other unforeseen events that can impact the performance of investments. Diversifying across different countries and regions can help mitigate these risks.

China ETF types

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 12 indices on the Chinese stock market that are tracked by ETFs, and the market is divided into three categories of stocks: A-stocks, B-stocks, and H-stocks.

• Equity ETFs: These are the most common type of China ETF and they invest in stocks of Chinese companies across various sectors such as technology, healthcare, and real estate. Examples include the iShares MSCI China ETF, KraneShares CSI China Internet ETF, and Invesco China Technology ETF.
• Fixed Income ETFs: These ETFs invest in Chinese bonds or debt securities.
• Currency ETFs: These ETFs focus on the Chinese currency, the Renminbi (RMB), and may track the performance of the RMB against other currencies.
• Sector-specific ETFs: These ETFs focus on a particular sector of the Chinese economy, such as technology, healthcare, or real estate. For example, the Global X MSCI China Consumer Discretionary ETF focuses on consumer discretionary stocks.
• Size-specific ETFs: These ETFs focus on companies of a particular size, such as large-cap or small-cap. For example, the iShares MSCI China A ETF tracks large-cap stocks, while the KraneShares SSE Star Market 50 Index ETF focuses on small-cap stocks.
• Geographically focused ETFs: These ETFs focus on companies based in a specific region within China, such as Shanghai or Shenzhen. For example, the Xtrackers Harvest CSI 300 China A-Shares ETF focuses on companies listed on the Shenzhen or Shanghai Stock Exchange.

China ETF performance

China's exchange-traded funds (ETFs) offer investors a way to geographically diversify their portfolios by investing in a basket of companies based in the world's second-largest economy. There are 17 China ETFs that trade in the United States, excluding inverse and leveraged ETFs, as well as funds with less than $50 million in assets under management (AUM).

The performance of China ETFs varies depending on the specific fund and the time period in question. As of September 1, 2022, Chinese equities, as measured by the MSCI China Index, had significantly underperformed the US stock market over the past 12 months, with a total return of -29.9% compared to the S&P 500's total return of -11.0%.

• IShares MSCI China A ETF (CNYA): Performance over one year: -21.4%.
• KraneShares Bosera MSCI China A 50 Connect Index ETF (KBA): Performance over one year: -21.6%.
• Xtrackers Harvest CSI 300 China A-Shares ETF (ASHR): Performance over one year: -22.5%.

It's important to note that the performance of these ETFs can fluctuate over time and may not always reflect the most recent returns.

In terms of the broader Chinese stock market, there are 12 indices tracked by ETFs, including the CSI 300, Dow Jones China Offshore 50, FTSE China 30/18 Capped, and the MSCI China index. The total expense ratio (TER) of ETFs on these indices ranges from 0.19% p.a. to 0.88% p.a.

When considering investing in China ETFs, it's important to keep in mind the risks and limitations, such as the potential impact of geopolitical issues and the COVID-19 pandemic on the Chinese economy and stock market performance.

China ETF issuers

China ETFs are funds that invest in stocks of companies domiciled in China. China's economic growth has made these ETFs attractive to investors, but there are also drawbacks, such as the lack of financial transparency and price swings in the Chinese market.

China ETFs are typically passively managed, meaning they mirror the holdings of an underlying index such as the MSCI China Index or the FTSE China Indexes. They come with low initial investments and low costs. As of December 2023, there were 55 China ETFs traded on U.S. stock exchanges, with combined assets of more than $24 billion.

• BlackRock Financial Management
• CSOP Asset Management
• Rafferty Asset Management LLC (Direxion)
• XShares Advisors LLC
• Exchange Traded Concepts
• First Trust Advisors LP
• Franklin Templeton Investments
• Global X Management Company LLC
• Barclays Global Fund Advisors
• Matthews International Capital Management
• Mirae Asset Global Investments Co., Ltd.
• Proshare Advisors LLC
• Rafferty Asset Management
• Rayliant Investment Research
• State Street Bank and Trust Co./IFTC
• Van Eck Associates Corp.
• Veritas Liberabit Vos LLC
• Wisdom Tree Asset Management Inc.

These ETF issuers offer a range of China ETFs that track different indices and provide exposure to various sectors and themes within the Chinese market.

Frequently asked questions