This article is for education purposes only, and not to be taken as advice to buy/sell. Please do your own due diligence before committing to any trade/investment.

Best China ETFs [Nov 2020; updated May 2021]

Investors looking to diversify their portfolios geographically can look to partake in China, the second-largest economy in the world through the purchase of China exchange-traded-funds (ETFs).

Which are the best China ETFs to buy to ride the growth in a nation that is likely to experience one of the fastest GDP growth in 2021 (1Q21 growth was already at a massive 18.3% YoY).

This is an updated article that was first published back in November 2020. I will look to compare the performances of the ETFs highlighted in November 2020 vs. May 2021 and see where the discrepancies in the respective ETF performances might be.

First thing first, a word of caution. Buying into China stocks is never a walk in the part as seen from recent events.

China tech stocks have been underperforming their US counterparts since late-2020, starting from the dramatic cancellation of Ant IPO, which many believe is due to the direct consequence of Jack Ma "shooting his mouth off" which angered Xi Jinping (China's president) and that resulted in an abrupt halt in 2020 most anticipated IPO, that is also expected to be the largest-ever.

Consequently, there was a sell-off in China tech stocks such as Alibaba (most obvious candidate), Tencent, JD, etc, all of which were trading at all-time highs before the shocking Ant IPO cancellation.

The announcement that the US is looking to ban tech exports to 89 Chinese firms also fuelled already-heightened tensions between the US and China on fronts ranging from trade and Taiwan to the handling of COVID-19 as President-elect Joe Biden prepares to take over from Donald Trump.

Of late, the Chinese government's clampdown on heavy-weight tech stocks such as Tencent and Meituan continues to put pressure on the nation's tech sector.

Might this be a possible long-term buying opportunity?

For those looking at a more diversified exposure, buying China ETFs is preferred over individual counters.

Here are some of the Best China ETFs to consider buying.

Best China ETFs: Criteria

I look at a few criteria when selecting these China ETFs which are listed in the US.

1. Returns (YTD and 5-year returns)
2. Morningstar Rating
3. Expense Ratio
4. Net Asset

The table below is screened using the Stock Rover platform.

Source: Stock Rover

This was the initial list of best-performing China ETFs that was screened back in November 2020. I highlighted which were the best China ETFs at that juncture in terms of YTD 2020 performances, Morningstar Rating, Lowest Expense Ratio, Largest Net Asset, and Best Overall.

• Best Performance YTD Nov 2020: KGRN
• Highest Morningstar Rated: CXSE
• Lowest Expense Ratio: FLCH
• Largest Net Asset: MCHI
• Best Overall: CXSE

Performance YTD [Nov 2020]

The best performing China ETF is KranShares MSCI China Environment Index ETF (KGRN), with a YTD return of 116.5%. This ETF seeks to provide investment results that correspond to the price and yield performance of MSCI China IMI Environment 10/40 Index.

The underlying index is a modified, free float-adjusted market capitalization-weighted index designed to track the equity market performance of Chinese companies that derive at least a majority of their revenues from environmentally beneficial products and services, as determined by MSCI Inc.

The Top 5 holdings of this ETF is NIO Inc ADR encompassing approx. 10.6% of the fund followed by BYD Co at 8.9%, China Conch Venture at 8.3%, China Vanke at 7.1%, and Shimao Group at 6.7%.

This ETF is also rated 4 stars by Morningstar which is one of the best among all the China ETFs available.

However, it has one of the highest expense ratios in this list at 0.79%.

Highest Morningstar Rated [Nov 2020]

The honor of the highest Morningstar rated China ETF, the only one with 5 stars is WisdomTree China ex-State-owned Enterprise Fund (CXSE) which looks to track the price and yield performance, before fees and expenses, of the WisdomTree China ex-State-Owned Enterprises Index.

Most would probably be very familiar with the names in this fund, with its Top 5 holdings being Alibaba at 14.7%, Tencent at 13.4%, Meituan at 5.8%, JD at 3.4%, and Ping An at 3.3%.

The performance of this top-rated China ETF isn't too shabby as well, with a YTD return of 53%, which ranks it No. 4 in the list based on YTD performance. Its expense ratio is actually on the low side at just 0.32%.

Lowest expense ratio (with > 20% YTD returns) [Nov 2020]

The China ETF fund with the lowest expense ratio but yet generate a decent YTD return of at least more than 20% is the Franklin FTSE China ETF (FLCH). This fund has a relatively low expense ratio of 0.19% and generated YTD returns of 30%.

The fund is benchmarked against the FTSE China Index and is designed to measure the performance of Chinese large- and mid-capitalization stocks, as represented by H-Shares, B-shares, and A-Shares.

This fund is however not rated by Morningstar.

Top 5 Fund holdings include stocks such as Alibaba at 18.9%, Tencent at 15.4%, Meituan at 4.7%, JD at 2.5%, and China Construction Bank at 2.3%.

Largest net asset [Nov 2020]

The iShares MSCI China ETF (MCHI) is the largest China ETF by net asset in this list, with a total net asset value of US$6.2bn. Its YTD performance is 27%

The investment seeks to track the investment results of the MSCI China Index. The fund generally will invest at least 90% of its assets in the component securities of the underlying index and in investments that have economic characteristics that are substantially identical to the component securities of the underlying index.

The index is a free float-adjusted market capitalization-weighted index designed to measure the performance of equity securities in the top 85% in market capitalization of the Chinese equity securities markets, as represented by the H-shares and B-shares markets.

This fund has a Morningstar rating of 3 stars with an expense ratio of 0.59% which is around the average level.

The Top 5 holdings of this ETF are Alibaba at 20.3%, Tencent at 15.5%, Meituan at 4.7%, JD at 2.5%, and China Construction Bank at 2.3%.

Best China ETFs: Overall [Nov 2020]

Among the China ETFs which seek to invest in the largest China corporations, the highly-rated CXSE seems to be a good China ETF to consider, given its strongest YTD performance vs. similar ETFs that also look to invest in the largest China corporations (ex-state owned). Besides, it also has one of the lowest expense ratios at only 0.32%.

While KGRN looks like a good consideration, it is relatively small in terms of its net assets at only US$16m compared to CXSE with US$441m in net assets.

Other notable China ETFs for one's consideration will include the Global X MSCI China Consumer Discretionary ETF (CHIQ) as well as KraneShares CSI China Internet ETF (KWEB), both of which ranks Top 3 in terms of YTD performance at 92% and 55% respectively. CHIQ is rated 4 stars while KWEB is rated 3 stars by Morningstar rating agency. They do however have relatively high expense ratios > 0.60%.

2020 vs. 2021 performances

Nov 2020

May 2021

As can be seen from the table above, some of the best performing China ETFs in 2020 have substantially underperformed in 2021 due to the weakness seen in the large-cap tech counters such as Alibaba, Tencent, and Meituan of-late. KGRN, which was the best performing ETF in 2020 with a massive return of c.116.5% over 11 months in 2020, was the worst-performing China ETF in 2021, with a negative return of 9%.

The best performing China ETFs in 2021 thus far are those associated with Taiwan stocks, such as the Franklin FTSE Taiwan ETF (FLTW) and a similar ETF under iShares (EWT). Both these ETFs are also rated highly by Morningstar, with a below-average expense ratio of 0.19% and 0.59% respectively.

Despite the higher expense ratio, EWT has a longer track record vs. FLTW, where its 5-year return is a very decent 176%. The table shows the key stock composition of the EWT ETF.

Conclusion

I have highlighted some of the Best China ETFs to consider buying for the long term. Some of these ETFs have performed well in 2020 but have disappointed in 2021. However, do look at their longer-term track record to ensure that these ETFs are not your "one-trick pony".

My personal favorite among this list of China ETFs are as follows:

EWT: Taiwan exposure with key holdings in stocks such as TSMC which is a major beneficiary of the current global chip shortage. Many of these Taiwan companies are also major chip manufacturers and designers and are leverage to the development of key themes such as 5G and IoT etc. The EWT ETF is suitable for those looking at stability vs. some of the more volatile China ETFs in this list.

CXSE: While its YTD performance (flat) has been lackluster, this has been achieved on the back of a massive sell-off in many of the China tech companies. The outperformance so far in 2021 vs. some of its peers is due to the counter's massive stake in Alibaba, with a combined portfolio composition of >22% across both Alibaba's US and HK-listed entities. If you believe that Alibaba is primed for a rebound after a good 5 months of underperformance, then this 5-star Morningstar-rated ETF might be a good selection for you.

KWEB: While its YTD performance might have been a disappointing -3.2%, this might be the pure-play ETF if you believe in the rebound of the China-tech industry as most of its holdings are China-tech stocks.

If you enjoyed reading this article and various other investment + personal finance articles, do visit New Academy of Finance. Royston has more than 10 years of buy and sell side experience as a financial analyst. He constantly posts interesting, valuable and actionable articles.

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