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DEFINITION of 'China ETF'

Exchange-traded funds that invest in and track the equity stakes of China-based companies, either through investment on Chinese stock exchanges or via foreign-listed shares such as American depositary receipts (ADRs). Because of regulations against certain types of foreign investment and the existence of many large state-run companies operating in China, ETFs that represent the nation are limited in their investment choices to companies that have public shares to offer. As with all ETFs, intraday trading is offered for China ETFs, which makes for increased liquidity and flexibility over China-based mutual funds.

BREAKING DOWN 'China ETF'

By holding an ETF, investors can increase exposure to China and still achieve the diversification of an index. Many investors are drawn to China because of its world-leading population and strong economic growth, but because many of the nation's companies are still state-run or private, China ETFs are skewed in their sector allocation toward sectors that have seen public offerings of stock. These sectors include telecommunications, financials and energy. As the Chinese markets open up, ETFs that model the region will become more diversified by sector.

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