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.
China’s GDP grew 2.3% in 2020 as the economy began to rebound by yearend from the disruptions caused by the COVID-19 pandemic. Still, that growth rate was the lowest in decades. GDP is expected to rebound in 2021, expanding by 8%.
Key Takeaways
- 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 CNYA.
- The top holdings of these ETFs are class A sponsored ADRs of XPeng Inc., Dongyue Group Ltd., and class A shares of Kweichow Moutai 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 significantly underperformed the U.S. stock market over the past 12 months, posting a total return of -10.0% compared to the S&P 500’s total return of 32.1%, as of Nov. 11, 2021. The best-performing China ETF for Q1 2022, 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 below are as of Nov. 12, 2021.
- Performance Over One-Year: 32.3%
- Expense Ratio: 0.79%
- Annual Dividend Yield: 0.01%
- Three-Month Average Daily Volume: 38,114
- Assets Under Management: $195.6 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 42% of its portfolio invested in the consumer discretionary sector and 25.9% and 18% allocated to industrials and information technology companies, respectively, as of the latest edition of the fund’s fact sheet on Oct. 31, 2021.
The fund’s top three holdings include class A sponsored American depositary receipts (ADRs) of XPeng Inc. (XPEV), an electric vehicle maker; class A sponsored ADRs of NIO Inc. (NIO), a holding company that designs and manufactures electric vehicles; and class A sponsored ADRs of Li Auto Inc. (LI), an electric vehicle maker.
- Performance Over One-Year: 21.4%
- Expense Ratio: 0.59%
- Annual Dividend Yield: 3.29%
- Three-Month Average Daily Volume: 17,564
- Assets Under Management: $82.5 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, with the top 10 holdings accounting for just over 15% of invested assets.
The top ECNS holdings include Dongyue Group Ltd. (189:HKG), a maker of fluorine and silicon chemicals; sponsored ADRs of JinkoSolar Holding Co. Ltd. (JKS), a manufacturer of solar energy products; and Xtep International Holdings Ltd. (1368:HKG), a maker of sports equipment.
- Performance Over One-Year: 11.3%
- Expense Ratio: 0.60%
- Annual Dividend Yield: 0.98%
- Three-Month Average Daily Volume: 141,492
- Assets Under Management: $701.2 million
- Inception Date: June 13, 2016
- Issuer: BlackRock Financial Management
CNYA tracks the MSCI China A Inclusion Index. CNYA holds hundreds of stocks with a broadly diverse basket of names. Financials, consumer staples, and industrials stocks are the top three sectors by portfolio representation, accounting for about half of invested assets. This large-cap fund follows a blended strategy, including both value and growth stocks in its holdings.
The top three holdings of CNYA include class A shares of Kweichow Moutai Co. Ltd. (600519:SHG), a partially state-owned food and beverage company; class A shares of Contemporary Amperex Technology Co. Ltd. (300750:SHE), a provider of batteries, power battery materials, and systems; and class A shares of China Merchants Bank Co. Ltd. (600036:SHG), a commercial bank.
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