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Exposure to China once was a binary attribute: either a portfolio had exposure, or it did not. Innovation in the ETF space has significantly changed this corner of the investing landscape; there are now multipe ETFs offering exposure to China, each with its own unique risk/return profile.

Below, we profile the most popular ETFs offering exposure to China, as well as some of key factors to consider when investing in Chinese markets.

China Price Movers

bull and bear figurine

There are a number of factors that contribute to movements in the Chinese markets, some of which can be extremely unpredictable. Drivers of Chinese markets include:

  • Currency Regulation: China’s currency policy has sparked fierce debate globally for several years now, with many analysts accusing the government of manipulating the yuan to boost China’s export market. Although Beijing now allows the yuan to fluctuate, this policy decision may once again change.
  • Export Activity: Closely related to the exchange rate, export activity is a major driver of economic growth in China. For decades, China has been a net exporter of relatively cheap goods to advanced economies, including the U.S. and Europe. Historically, low labor costs have allowed Chinese companies to compete effectively with foreign products on the basis of price. Overseas demand regulates China’s exporting process, and when the rest of the world is under financial scrutiny, China may feel the pinch.
  • Infrastructure Development: Although many Chinese cities are among the most modern in the world, parts of rural China remain far behind the civilized world in terms of infrastructure. Growth of China’s economy depends partly on continued development and modernization of these remote areas.
  • Government Intervention: As a communist nation, China’s government has the ability to exert a significant amount of control over the private sector. Although China has become increasingly open to foreign investment in recent years, a number of sectors (such as financials) remain under heavy government influence.
  • Politics: Geopolitical tensions in Asia will inevitably impact China. Along with a long-standing feud with Taiwan, China is known as the chief supporter of the rogue regime in North Korea which has attracted attention as of late. Should Chinese growth rates slow down, it could create political instability and unrest which would ward off potential investors who are wary about allocating their money to an uncertain market.
  • Commodities: China is now the world’s largest user of energy, and accounts for a significant portion of global commodity demand. Because the country imports significant amounts of raw materials, Chinese industries are vulnerable to swings in commodity prices.

Large Cap China ETFs

Many of the largest ETFs offering exposure to Chinese equities are tilted heavily towards giant and large cap stocks. Some of these ETFs include:

  • iShares China Large-Cap ETF (FXI B-): One of the most popular ETFs in this space, FXI invests in only 25 individual holdings, making its exposure quite narrow and extremely limited. It does however target only the largest and most stable Chinese companies.
  • MSCI Hong Kong ETF (EWH A): This fund seeks to measure the performance of the Hong Kong equity market. The portfolio consists of over 40 securities, making it a bit more diversified than FXI. Giant caps account for the majority of holdings.
  • MSCI China ETF (MCHI A-): This ETF’s portfolio is the largest of this list, consisting of roughly 140 securities. Again, giant and large cap funds dominate the portfolio.

Small Cap/All Cap ETFs

Small cap ETFs covering the U.S. market have long been popular with investors, but opportunities to access smaller companies listed in foreign markets have historically been limited. That is beginning to change, however, as investors focus more on the international component of portfolios and begin seeking out alternatives to large cap-heavy funds.

The following ETFs exclusively target small-cap Chinese equities:

  • China Small Cap ETF (HAO B+)
  • db X-trackers Harvest CSI 500 China-A Shares Small Cap Fund (ASHS n/a)
  • iShares MSCI China Small-Cap ETF (ECNS A+)

Sector ETFs

china technology etfs

Again, sector-specific funds covering various corners of the U.S. market are nothing new. But until recently there weren’t many options for investors looking to bet on a specific part of the Chinese equity market. Now, there are a handful of ETFs offering exposure to everything from energy to technology to infrastructure:

  • CSI China Internet ETF (KWEB C+)
  • China Consumer ETF (CHIQ B-)
  • China Technology ETF (CQQQ B-)
  • China Financials ETF (CHIX C+)
  • NASDAQ China Technology ETF (QQQC C)
  • China Industrials ETF (CHII B-)
  • China Energy ETF (CHIE C)
  • China Materials ETF (CHIM C)

Inverse/Leveraged ETFs

For the most risk tolerant of investors, there are a number of inverse and leveraged ETFs that provide an opportunity to amplify exposure to Chinese equity markets:

  • Ultrashort FTSE/Xinhua China (FXP C+)
  • Daily China Bear 3x Shares (YANG C)
  • Short FTSE/Xinhua China (YXI B-)
  • Daily China Bull 3x Shares (YINN B)
  • Ultra FTSE/Xinhua China 25 (XPP C+)

Real Estate ETFs

With the worlds largest (and increasingly urban) population, China’s real estate markets are often volatile, but have a history of delivering impressive gains. There is one ETF that clears a path for investors to play China’s dynamic real estate sector:

China Real Estate ETF (TAO C): TAO seeks to replicate the performance of the AlphaShares China Real Estate Index, a benchmark that is designed to measure the performance of the investable universe of publicly-traded companies and REITs deriving a majority of their revenues from real estate development, management and/or ownership of property in China, Hong Kong, and Macau.

Currency ETFs

For those looking to make a bet on the chinese yuan, there are three ETFs offering exposure to China’s currency:

  • WisdomTree Chinese Yuan Fund (CYB A+)
  • Market Vectors Chinese Renminbi/USD ETN (CNY B)
  • CurrencyShares Chinese Renminbi Trust (FXCH B+)

The Bottom Line

As highlighted above, there are many ways for investors to make a play on China, whether it is through equities or other asset classes. The ETF space also provides several ways to gain both broad and hyper targeted exposure, depending on investors’ objectives.

Disclosure: No positions at time of writing.

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