China exchange-traded funds (ETFs) offer a way for investors to geographically diversify their portfolios by owning stakes in a basket of companies based in the world's second-largest economy. Despite the large number of state-owned Chinese enterprises, there are still many companies there whose shares are publicly traded, including Tencent Holdings Ltd. (700), Ping An Insurance Group Co. of China Ltd. (601318), and China Yangtze Power Co. Ltd. (600900).
Certain Chinese stocks were 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.
- Chinese equities significantly underperformed the U.S. stock market over the past year.
- The China ETFs with the best one-year trailing total return are KGRN, ECNS, and CHIQ.
- The top holdings of these ETFs are Class H shares of BYD Company Ltd., Chinasoft International Ltd., and Alibaba Group Holding 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 significantly underperformed the U.S. stock market over the past 12 months, posting a total return of 2.4% compared to the S&P 500's total return of 35.5%, as of Aug. 11, 2021. The best-performing China ETF for Q4 2021, based on performance over the past year, is the KraneShares MSCI China Clean Technology Index ETF (KGRN). We examine the three best China ETFs below. All numbers are as of Aug. 12, 2021.
- Performance Over One-Year: 76.2%
- Expense Ratio: 0.79%
- Annual Dividend Yield: 0.01%
- Three-Month Average Daily Volume: 67,818
- Assets Under Management: $197.2 million
- Inception Date: Oct. 13, 2017
- Issuer: CICC
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's goal is to profit from China's increasing investments in clean energy technologies, with 44% of its portfolio invested in the consumer discretionary sector and 23% and 18% allocated to industrials and information technology companies, respectively.
The fund's top three holdings include Class H shares of BYD Company Ltd. (1211:HKG), a manufacturing company; Class A sponsored American depositary receipts (ADRs) of NIO Inc. (NIO), a holding company that designs and manufactures electric vehicles; and Class A sponsored ADRs of XPeng Inc. (XPEV), an electric vehicle maker.
- Performance Over One-Year: 26.2%
- Expense Ratio: 0.59%
- Annual Dividend Yield: 3.21%
- Three-Month Average Daily Volume: 19,763
- Assets Under Management: $92.2 million
- Inception Date: Sept. 28, 2010
- Issuer: BlackRock Financial Management
ECNS tracks the MSCI China Small Cap Index, an index comprised of small-cap companies based in China. Because of its focus on this segment of the Chinese equities market, ECNS stands out from many other China ETFs, which focus on the largest China-based companies. The ETF is also highly diversified, holding 280 positions, with the top 10 holdings accounting for just under 20% of invested assets.
The top ECNS holdings include Chinasoft International Ltd. (354:HKG), a software and IT company; GCL-Poly Energy Holdings Ltd. (3800:HKG), a green energy supplier; and Dongyue Group Ltd. (189:HKG), a maker of fluorine and silicon chemicals.
- Performance Over One-Year: 20.8%
- Expense Ratio: 0.65%
- Annual Dividend Yield: 0.07%
- Three-Month Average Daily Volume: 335,320
- Assets Under Management: $751.1 million
- Inception Date: Nov. 30, 2009
- Issuer: Mirae Asset Global Investments Co., Ltd.
CHIQ tracks the MSCI China Consumer Discretionary 10/50 Index, which gauges the performance of large- and mid-cap Chinese consumer discretionary securities. The ETF provides exposure to just over 80 Chinese consumer discretionary companies and is effectively a play on the growing wealth and spending power of the country’s population.
CHIQ's top three holdings include Alibaba Group Holding Ltd. (9988:HKG), a provider of e-commerce, Internet infrastructure, online financial, and Internet content services; Class B shares of Meituan (3690:HKG), an e-commerce platform; and Class A sponsored ADRs of NIO Inc.
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