There is an old Chinese curse, "May you live in interesting times." 2020 was certainly an interesting year for investors with holdings in China. Early in 2020, short-sellers went after China as the coronavirus began spreading. However, Chinese markets snapped back quickly, led higher by technology and e-commerce companies, such as Alibaba. Exchange-traded funds (ETFs) offer foreign investors easy ways to participate in these kinds of rallies.

Key Takeaways

  • China has been growing rapidly, and as the ETFs below indicate, there are some impressive returns to be made.
  • The Direxion Daily FTSE China Bull 3X Shares (YINN) is a highly leveraged 3x fund that offers good liquidity for short-term traders, with the possibility of big gains and large losses.
  • The ProShares Ultra FTSE China 50 (XPP) is a leveraged 2x fund that provides a middle ground in performance and risk between the other two funds on this list.
  • The Global X China Materials ETF (CHIM) tracks the Solactive China Materials Total Return Index, and it may be better for long-term investors because of its lack of leverage and excellent yield.

ETFs in China

Since China has the world's second-largest economy, investing there is attractive for many reasons. China has been growing rapidly, and as the ETFs below indicate, there are some impressive returns to be made. Of course, there are also some equally large risks to navigate. The economic impact of the coronavirus crisis far exceeded the trade disputes of previous years.

China ETFs may include companies listed in the United States as well as Hong Kong and Shanghai. In addition, two of these ETFs invest in derivatives. Therefore, investors should not consider these pure plays on Chinese stocks.

There is always the risk in China of government intervention or manipulation, but using ETFs to invest there offers some protection. With a diversified set of stocks in an ETF, you are less likely to suffer from one company's behavior. That said, returns in China are occasionally stellar.

The Chinese market is volatile, so investors need to be ready for some ups and downs. That is especially true with leveraged ETFs. An ETF can fall as fast as it rises if the market turns sour. However, because ETFs can be traded like stocks, you can sell them fairly quickly if you decide you want out. Most importantly, investors cannot lose more than they invest in leveraged ETFs, unlike traditional leverage using margin accounts.

Top 3 ETFs

We have selected three funds focused on China that offered strong returns between April and early November in 2020. However, their results can also be much worse than the market during downturns.

1. Direxion Daily FTSE China Bull 3X Shares (YINN)

The Direxion Daily FTSE China Bull 3X Shares (YINN) uses high leverage. Because it seeks to multiply the FTSE China 50 Index's returns by 3x, it should be considered high-risk. The underlying index includes the 50 biggest Chinese companies trading on the Hong Kong Stock Exchange.

YINN lost more than 50% in the first quarter of 2020 before gaining more than 100% later in the year. Furthermore, YINN has a much higher volume than the other entries on this list, which means lower spreads for frequent traders. So, investors can decide tactically if it is a good buying opportunity. On the other hand, there are dangers to leveraged ETFs in the long-run.

  • Avg. Volume: 1,943,615
  • Net Assets: $262.59 million
  • Yield: 1.10%
  • Price Return from 04/01/20 to 11/04/20: 105% 
  • Expense Ratio (net): 1.37%

2. ProShares Ultra FTSE China 50 (XPP)

The ProShares Ultra FTSE China 50 (XPP) uses the FTSE China 50 Index as its benchmark. It invests in securities from that index, but it also may invest in derivatives. In other words, it uses leverage.

XPP tries to multiply the returns of the underlying index by 2x. Of course, past performance does not guarantee future returns.

  • Avg. Volume: 11,383
  • Net Assets: $31.92 million
  • Yield: 0.23%
  • Price Return from 04/01/20 to 11/05/20: 71% 
  • Expense Ratio (net): 0.95%

3. Global X China Materials ETF (CHIM)

The Global X China Materials ETF (CHIM) tracks the Solactive China Materials Total Return Index. It aims to keep at least 80% of its assets invested in securities from that index.

It may invest in American Depositary Receipts (ADRs), as well as Global Depositary Receipts (GDRs). The focus is on the materials sector. It does not use leverage like the other ETFs on this list. The lack of leverage and an excellent yield make it a better fit for long-term asset allocations.

  • Avg. Volume: 831
  • Net Assets: $1.82 million
  • Yield: 3.16%
  • Price Return from 04/01/20 to 11/05/20: 44% 
  • Expense Ratio (net): 0.66%

The Bottom Line

China is an exciting place, financially speaking. Its growth is rapid, and investors are making money by investing there. However, there are still risks. The Chinese economy could stall, and the government meddles more in the markets than U.S. investors would like.

Examine the China ETFs on this list to see if you want to put part of your portfolio in higher-risk investments. Know your risk tolerance and invest accordingly. Remember that leveraged ETFs can quickly turn against you if any of their derivatives become bad investments.