China exchange-traded funds (ETFs) offer a way for investors to geographically diversify their portfolios by owning a basket of companies in the world's second-largest economy. Despite the large number of state-owned Chinese enterprises, there are still many companies whose shares are publicly traded and provide investors with opportunities. China ETFs own companies such as Tencent Holdings Ltd. (700), Ping An Insurance Group Co. of China Ltd. (601318), and China Yangtze Power Co. Ltd. (600900).

Certain Chinese stocks are being delisted by the New York Stock Exchange (NYSE) after an executive order signed by former U.S. President Donald Trump in November 2020 banned U.S. investors from investing in Chinese companies with alleged ties to the Chinese military. Despite a new U.S. administration led by President Joe Biden, ongoing trade tensions between the U.S. and China continue to pose risks to investors in China-based assets.

Key Takeaways

  • Chinese equities dramatically outperformed the broader market over the past year.
  • The ETFs with the best 1-year trailing total return are KGRN, CHIQ, and CNXT.
  • The top holdings of these ETFs are class A sponsored ADRs of NIO Inc., class B shares of Meituan, and class A shares of Contemporary Amperex Technology Co. Ltd., respectively.

There are 17 China ETFs that trade in the U.S., excluding inverse and leveraged ETFs, as well as funds with less than $50 million in assets under management (AUM). Chinese equities, as measured by the MSCI China Index, have outperformed the broader market with a total return of 52.3% over the past 12 months compared to the S&P 500's total return of 20.8%, as of February 2, 2021. The best-performing China ETF for Q2 2021, based on performance over the past year, is the KraneShares MSCI China Environment ETF (KGRN). We examine the top 3 best China ETFs below. All numbers reported below are as of February 3, 2021.

KraneShares MSCI China Environment ETF (KGRN)

  • Performance over 1-Year: 180.8%
  • Expense Ratio: 0.79%
  • Annual Dividend Yield: 0.01%
  • 3-Month Average Daily Volume: 95,044
  • Assets Under Management: $148.2 million
  • Inception Date: October 13, 2017
  • Issuer: KraneShares

KGRN tracks the MSCI China IMI Environment 10/40 Index, which gauges the performance of Chinese securities that generate at least 50% of their revenues from environmentally beneficial products and services. The ETF provides exposure to companies poised to benefit from China's increasing investments in clean energy technologies. It follows a blended strategy, investing in a mix of growth and value stocks with a range of market capitalizations. The fund's top three holdings include class A sponsored ADRs of NIO Inc. (NIO), a holding company that designs and manufactures electric vehicles; Xinyi Solar Holdings Ltd. (968:HKG), a manufacturer of solar photovoltaic glass; and class H shares of BYD Co. Ltd. (1211:HKG), a manufacturer of electric vehicles, rechargeable batteries, photovoltaic products, and other electronic components.

Global X MSCI China Consumer Discretionary ETF (CHIQ)

  • Performance over 1-Year: 127.0%
  • Expense Ratio: 0.65%
  • Annual Dividend Yield: 0.11%
  • 3-Month Average Daily Volume: 525,786
  • Assets Under Management: $599.8 million
  • Inception Date: November 30, 2009
  • Issuer: Global X

CHIQ tracks the MSCI China Consumer Discretionary 10/50 Index, which gauges the performance of the large- and mid-cap Chinese consumer discretionary securities. The ETF provides exposure to the consumer discretionary segment of the Chinese economy. It is comprised of 75 securities and follows a blended strategy, investing in both value and growth stocks. The fund's top three holdings include class B shares of Meituan (3690:HKG), an e-commerce platform; sponsored ADRs of Alibaba Group Holding Ltd. (BABA), a provider of e-commerce, internet infrastructure, online financial, and internet content services; and class A sponsored ADRs of NIO.

VanEck Vectors ChinaAMC SME-ChiNext ETF (CNXT)

  • Performance over 1-Year: 91.5%
  • Expense Ratio: 0.65%
  • Annual Dividend Yield: 0.01%
  • 3-Month Average Daily Volume: 18,227
  • Assets Under Management: $54.4 million
  • Inception Date: July 24, 2014
  • Issuer: VanEck

CNXT tracks the SME-ChiNext 100 Index, which gauges the performance of the 100 largest and most liquid Chinese A-share stocks listed on the Small and Medium Enterprise Board and the ChiNext Board of the Shenzhen Stock Exchange. The ETF provides exposure to non-government owned small- and medium-sized enterprises in China. The information technology, consumer discretionary, consumer staples, and healthcare segments of the Chinese economy are well-represented within the fund. It follows a blended strategy of investing in a mix of value and growth stocks. The fund's top three holdings include class A shares of Contemporary Amperex Technology Co. Ltd. (300750:SHE), a battery products manufacturing company; class A shares of East Money Information Co. Ltd. (300059:SHE), a financial and stock information website provider; and class A shares of Luxshare Precision Industry Co. Ltd. (002475:SHE), a manufacturer of cable assembly and connector system solutions for consumer, automotive, cloud, and enterprise applications.

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