Exchange-traded funds (ETFs) with a China focus are increasingly popular and plentiful. As China's economy continues to outpace the economies of developed countries and China transitions from just a major emerging market economy into a major global economic power, more and more investors are seeking exposure to the China boom. Since many investors are largely unfamiliar with Chinese companies and stocks, ETFs that track the major Chinese stock market indexes provide easy solutions for investing in China.

Among the most popular China stock indexes are the Shanghai SE Composite Index, the FTSE Xinhua 200, the MSCI China A Index and the CSI 300 Index. The CSI 300 Index comprises 300 stocks selected from the total available list of A-share companies located in China. The stocks that compose the index are included based on both liquidity and market capitalization. The index and its selection criteria are designed to represent the overall performance of A-shares that are traded on either the Shenzhen or Shanghai stock exchanges.

A-shares are the stocks of companies headquartered in mainland China that are traded on the Shenzhen and Shanghai stock exchanges. These shares are commonly only available to be traded by Chinese citizens. Foreign investment is typically only allowed through a special investment program called the Qualified Foreign Institutional Investor system. A-shares are quoted in China's currency, the yuan/renminbi. A-shares are distinguished from the more openly traded H-shares on the Hong Kong Stock Exchange that are quoted in Hong Kong dollars and primarily available to foreign investors rather than Chinese citizens, despite the fact that H-shares still represent firms domiciled in mainland China. The A-shares commonly trade at a high premium to H-shares, often more than 100% higher, primarily due to large discrepancies between supply and demand for the highest-quality Chinese stocks. The disparity is so marked that there is even an index that tracks the premium spread between the two types of shares for dual-listed Chinese companies.

Deutsche X-trackers Harvest CSI 300 China A-Shares Fund

The Deutsche X-trackers Harvest CSI 300 China A-Shares Fund (NYSEARCA: ASHR), launched by Deutsche Bank in 2013, physically holds China A-shares. The fund is able to do so through its sub-adviser, Harvest Global Investments, which has a Qualified Foreign Investors license. The fund has over $500 million in assets under management (AUM) and aims for investment results that mirror the performance of the CSI 300 Index. Under normal market conditions, the fund remains at least 80% invested in the stocks that make up the underlying index.

Financial sector stocks account for almost 40% of the fund's portfolio holdings. Industrials and consumer cyclicals are other major sector components. Primary holdings of the Deutsche X-trackers Harvest CSI 300 China A-Shares Fund include the Ping An Insurance Group Company, China Merchants Bank, real estate development firm China Vanke Company Ltd., Citic Securities Company and the Shanghai Pudong Development Bank. The fund's annual portfolio turnover ratio is 58%.

The Deutsche X-trackers Harvest CSI 300 China A-Shares Fund ETF has an expense ratio of 0.8%. It offers a dividend yield of 0.27%. The fund's one-year total return as of the end of 2014 was an impressive 31.1%, but its 2015 performance is barely positive. The ASHR ETF is appropriate for investors seeking broad exposure to the overall performance of China A-share equities and who are willing to accept the currency exchange risk involved, since the fund's portfolio holdings are denominated in yuan rather than U.S. dollars. Investors interested in mitigating the currency exchange risk may wish to consider the alternate Deutsche X-trackers CSI 300 China A-Shares Hedged Equity ETF.

Market Vectors ChinaAMC A-Share ETF

The Market Vectors ChinaAMC A-Share ETF (NYSEARCA: PEK), introduced by Van Eck in 2010, has approximately $100 million in total assets. Like the ASHR fund, this fund holds physical China A-shares by working through a sub-adviser, China Asset Management Corporation. However, this is the result of a recent change in the structure of this ETF, which had previously gained access to A-shares through a swap agreement with Credit Suisse Bank. This fund is noticeably less liquid than the ASHR fund and generally trades with wider bid-ask spreads. The fund aims to replicate the performance of the CSI 300 Index, though it is at least 80% invested in the equities that comprise the index. The fund may also invest in securities that the fund manager deems to have characteristics essentially identical to the characteristics of the stocks contained in the underlying index.

PEK's holdings are not quite as financial sector-heavy as ASHR's. This ETF comprises approximately 30% financials, 15% consumer cyclicals and 10% technology sector stocks. However, the fund's major holdings are still essentially the same as those of ASHR. Ping An Insurance Group Company still tops the list, and China Merchants Bank and the Shanghai Pudong Development Bank are among the top five holdings. Other major holdings include the CRRC Corporation Ltd., the world's largest train builder, and the Industrial Bank Company Ltd. The annual portfolio turnover ratio for the fund is 59%.

The Market Vectors ChinaAMC A-Share ETF has an expense ratio of 0.72%, about average for this category of ETFs. It does not, as of November 2015, offer a dividend yield. The fund's five-year annualized return is 2.7%. Morningstar rates this ETF as above average in both risk and return. The PEK fund is appropriate for investors seeking exposure to the stocks contained in the CSI 300 benchmark index. However, the low liquidity level for this ETF means that trading it involves an increased risk level.

CSOP China CSI 300 A-H Dynamic ETF

CSOP Asset Management launched the CSOP China CSI 300 A-H Dynamic Index ETF (NYSEARCA: HAHA) in October 2015. It has approximately $4.5 million in assets. This fund tracks the benchmark CSI 300 index using a slightly different trading strategy. As the fund name indicates, this ETF holds both A-shares and H-shares. It attempts to profit from the A-share and H-share price differences of dual-listed companies. The fund manager uses an algorithm to select the listing likely to perform better. This trading only affects about 20% of the fund's holdings, since the bulk of the fund's holdings are only A-shares with no corresponding H-shares.

One month following its inception, the fund's primary holdings essentially mirror those of the ASHR fund, with Ping An Insurance Group Company still holding the top spot. Since the fund holds nearly 300 stocks, no single equity accounts for more than 5% of total portfolio assets. Because of the fund's investment strategy, it will likely have a higher portfolio turnover ratio than the ASHR or PEK funds.

The expense ratio for the HAHA fund is 0.75%. The fund has not been trading long enough to establish dividend yield, performance or risk/reward ratings.

This ETF is appropriate for investors who believe that the fund's investing strategy of trading the price disparities between A-shares and H-shares will make the fund more profitable than the ETFs that track the benchmark CSI 300 Index in a more straightforward manner. However, the fund is only suited for investors with a sufficiently high risk tolerance to invest in a new, unproven ETF.

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