China ETFs (exchange-traded funds) offer investors an easy way to diversify their investment strategy. In March of 2020, tons of short-sellers rushed into the Chinese markets hoping to capitalize on the drop.
Surprisingly, however, Chinese stocks rushed back up soon after. Regardless of whether you wanted to hop in on the short-selling action or take long positions, a China ETF could have offered you exposure to the markets.
The Chinese economy is still considered by some to be an emerging market, and the best way to take advantage of it is through ETFs. They allow you to gain some exposure to potentially exciting gains while limiting your downside with a diversified selection of stocks. This post will cover the unique attributes of China ETFs, their pros and cons, and finally 5 of the best China ETFs on the market right now.
What Makes China So Unique?
Though Chinese companies and American companies may seem similar, there are still key attributes that make Chinese markets different. If you're to realize any meaningful investment returns, you'll need to understand these differences.
One of the main ways that China differs from the US is government influence. Although in America certain government policies will have an impact on the stock market, for the most part it's a “free market” country. In China, that's not quite the case. As a communist country, China has a government that retains tons of control over the private sector (and in turn over the stock prices). This is an important factor to note before investing in Chinese markets.
The second way that China is unique is that a lot of its growth is tied to export activity and infrastructure development. These two factors have long been huge parts of the Chinese economy. If either one of them dwindles, there's a high chance the stock market will reflect it. For foreign investors without an insider's view of China, this piece of information is crucial.
Lastly, Chinese markets differ from other countries' because of their susceptibility to politics. Remember, Chinese markets sway and swing largely depending on government intervention. Because of this, if geopolitical tensions rise, potential investors may be wary (for fear of an uncertain market). For this reason, politics play a huge part in impacting Chinese markets. Issues such as the trade war in recent years and China's support of North Korea should all be taken into consideration before allocating any money.
Still, with all these factors and additional risks to consider, China remains an attractive option for investors. In recent years, the growth has been fantastic. And although past performance is no guarantee of future results, China could potentially offer some very lucrative returns.
Pros and Cons of China ETFs
Before dipping into your bank accounts and making investment decisions, it's important to consider the advantages and disadvantages of the investment thoroughly. Here are some pros and cons of investing in China ETFs.
- China is one of the biggest drivers of global growth. Investing in an ETF could let you get in on the action.
- China's tech sector dominates in global markets
- China has a huge consumer base and also has second-mover advantage (concepts are implemented there that are already tried and tested somewhere else in the world)
- The Chinese markets can be very volatile and thus make the chance of possible loss of principal that much higher (due to politics or government intervention)
- There can be issues with transparency and integrity of data causing current performance of a stock to not actually be indicative of the business's health
- China is still technically an emerging market and thus isn't as mature as countries like the United States or England. This could impact the behavior of Chinese equities.
5 Top China ETFs
If you've reviewed the pros and cons and wish to proceed with investing in Chinese markets to reach your investment objectives, ETFs are a great way to go. Why sift through tons of investment products when you can buy a whole BUNCH of securities with one ETF? Here are the 5 best China ETFs that you can buy right now!
- Assets Under Management: $2.67B
- Expense Ratio: 0.59%
- Average Daily Volume: 3.5M
- Total Return (To Date): +35%
- Issuer: iShares
Founded in 2011, iShares MSCI China ETF offers investors exposure to large-cap stocks inside and outside of mainland China. The fund is market cap-weighted and consists of investable China shares including H-shares, B-shares, P-chips, Red-chips, and foreign listings. Basically, the fund seeks to be a composition of Chinese stocks available to U.S. investors and the rest of the world. When it comes to tracking the MSCI China Index, MCHI is one of the best.
- Assets Under Management: $2.77B
- Expense Ratio: 0.65%
- Average Daily Volume: 3.1M
- Total Return (To Date): +56%
- Issuer: Xtrackers
Incepted in 2013, Xtrackers CSI 300 aims to track the 300 largest and most liquid Chinese shares. What makes it unique is that it's the first ETF in which investors are able to access the China A-share market directly. ASHR invests mainly in mainland Chinese markets, which means you will find stocks listed on the Shenzhen and Shanghai stock exchange-listed, but not ones from the Hong Kong Stock Exchange.
- Assets Under Management: $4.7B
- Expense Ratio: 0.73%
- Average Daily Volume: 6M
- Total Return (To Date): +88%
- Issuer: KraneShares
With almost $5 billion net asset value, KWEB is a pretty massive ETF. KWEB seeks to track the performance of all publicly traded Chinese companies whose main business is in the internet or internet-related sector. This means that a KWEB investor's shares will have exposure to Chinese internet companies similar to Google, Facebook, Twitter, Amazon, and eBay. Focusing mostly on small-cap stocks, KWEB is a good option for exposure to pureplay Chinese software and service providers.
- Assets Under Management: $394M
- Expense Ratio: 1.36%
- Average Daily Volume: 2.1M
- Total Return (To Date): -69%
- Issuer: Direxion
At first glance, YINN's lower trading volume, performance data, and lower net asset value might turn you off. But writing off this ETF would be a mistake. YINN seeks to provide daily investment returns that are 3x the performance of the FTSE China 50 Index. What this means is that if the index rises by 1% on any particular day, YINN should rise b 3%! An important note: YINN uses leverage to achieve its returns so expect higher volatility with this ETF.
- Assets Under Management: $891M
- Expense Ratio: 0.65%
- Average Daily Volume: 337K
- Total Return (To Date): +81%
- Issuer: Global X
Founded in 2009, CHIQ gives investors a way to access tons of China's consumer and discretionary sector companies. The shares of the fund aim to provide investment results that track the MSCI China Consumer Discretionary 10/50 Index. Comprised of A-shares, B and H shares, Red chips, and P chips, CHIQ offers international investors an easy way to express a sector view on China.
China is not just a place with awesome golf clubs, great food, and lively traditions. It's also an emerging market where fortunes can be made or lost. Regardless of whether you make 5 figures or millions, a little diversification in your investment portfolio can only help. If you DO decide to invest in China, here are some of the best China ETFs to do it through:
- iShares MSCI China ETF (MCHI)
- Xtrackers Harvest CSI 300 China A-Shares ETF (ASHR)
- KraneShares CSI China Internet ETF (KWEB)
- Direxion Daily FTSE China Bull 3X Shares (YINN)
- Global X MSCI China Consumer Discretionary ETF (CHIQ)
Be sure to do your research before investing in these financial instruments. Though this post covers a lot, there's still quite a bit of important information worth knowing before diving in. Once you're confident in your investment thesis though, you can start investing in China ETFs! Who knows… they just might be the key to your financial success.