China's economy has grown rapidly over the past few decades. Here we look at how to invest in Chinese stocks with 6 popular ETFs.
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Introduction – Why Chinese Stocks?
China is a nation of over 1 billion people. The Chinese economy has experienced exponential growth in recent years and is now the second-largest economy in the world behind the United States, primarily due to its large manufacturing and export industries. It is expected to surpass the U.S. in the near future. China is also now the largest market for cars, smartphones, and retail.
Globalization and the country's investment in infrastructure have been the primary drivers of China's massive growth. In recent years, free-market capitalism has been able to peek through the communist government-controlled economy. Combined with advances in technology and mobile computing power, this has sparked more outside investment and a burgeoning middle class of Chinese consumers. Whereas previously the Chinese economy was famous almost exclusively for its manufacturing base, we're now seeing a large consumer-driven aspect of the economy.
Investors may also simply desire to diversify internationally as a hedge for their U.S. stock positions, in which case China is a good place to look. As China continues to become increasingly independent and self-sufficient, Chinese stocks are a great diversifier with their low correlation to the U.S. stock market, lower than broad Emerging Markets funds. The famous Ray Dalio is bullish on China for this very reason.
Given these facts, investors are right to be interested in buying Chinese stocks, as they should continue to see impressive growth as China's retail presence increases in size. Conveniently, contrary to popular belief, this growth has coincided with an increased in investment efficiency and price informativeness among Chinese stocks, now seemingly on par with the U.S.* Thus, China is now a market that simply cannot be ignored.
How to Buy Chinese Stocks – 6 Popular ETFs
The best way to invest in China is through U.S.-listed ETFs (exchange traded funds), which are simply baskets of Chinese stocks. Below are some popular options.
MCHI – iShares MSCI China ETF
The iShares MSCI China ETF is the most popular ETF to get broad exposure to Chinese stocks. The fund seeks to track the MCHI iShares MSCI China ETF, accessing multiple sectors and cap sizes in the Chinese stock market. It holds over 600 stocks and has an expense ratio of 0.59%.
GXC – SPDR S&P China ETF
The SPDR S&P China ETF is comparable to MCHI above, with an identical expense ratio of 0.59%. The fund tracks the S&P China BMI Index and has over 700 holdings, providing broad exposure to the Chinese market.
FXI – iShares China Large-Cap ETF
The iShares China Large-Cap ETF seeks to track the FTSE China 50 Index-USD NET, comprised of the 50 largest and most liquid stocks that trade on the Hong Kong Stock Exchange. Mega-caps like Baidu and Alibaba are excluded. The fund has an expense ratio of 0.74%.
KWEB – KraneShares CSI China Internet ETF
The KraneShares CSI China Internet ETF seeks to track the CSI Overseas China Internet Index. This fund focuses on tech and consumer discretionary stocks related to China's internet presence, providing major exposure to tech, internet, and e-commerce players like Baidu, Alibaba, JD.com, and Tencent. KWEB is extremely popular because these are the precise industries driving major growth for the Chinese stock market, so these are the exact stocks investors are usually seeking. The fund has 49 holdings and an expense ratio of 0.76%.
ASHR – Xtrackers Harvest CSI 300 China A-Shares ETF
The Xtrackers Harvest CSI 300 China A-Shares ETF tracks the CSI 300 Index, an index of the 300 largest Chinese stocks traded on the Shanghai and Shenzhen exchanges. The fund holds the highly-sought-after China A-shares, which U.S. investors have historically been prevented from accessing. Note that this fund naturally tilts heavily to Financials. It has an expense ratio of 0.65%.
CXSE – WisdomTree China ex-State-Owned Enterprises Fund
The WisdomTree China ex-State-Owned Enterprises Fund is a clever ETF that is broadly exposed to China but selectively excludes state-owned enterprises, defined as government ownership of greater than 20%. The theory is that government ownership can negatively impact the operational efficiency of a company, as operations at least partially serve government interests.
The data seems to agree. CXSE has outperformed its broader benchmark historically, as well as the other funds on this list, and has had higher Return on Equity as a measure of quality. Conveniently, this fund also happens to be the cheapest on the list with an expense ratio of 0.32%.
I explored why one might want to avoid state-owned enterprises here.
Where to Buy These China ETFs
All these China ETFs should be available at any major broker. My choice is M1 Finance. The online broker has zero transaction fees and zero account fees, and offers fractional shares, dynamic rebalancing, and a modern, user-friendly interface and mobile app. I wrote a comprehensive review of M1 Finance here.
* The Real Value of China's Stock Market – Carpenter, Lu, Whitelaw – http://people.stern.nyu.edu/jcarpen0/pdfs/Carpenter%20Lu%20Whitelaw%20-%20The%20Real%20Value%20of%20China%27s%20Stock%20Market.pdf
Disclaimer: While I love diving into investing-related data and playing around with backtests, this is not financial advice, investing advice, or tax advice. The information on this website is for informational, educational, and entertainment purposes only. Investment products discussed (ETFs, mutual funds, etc.) are for illustrative purposes only. It is not a recommendation to buy, sell, or otherwise transact in any of the products mentioned. I always attempt to ensure the accuracy of information presented but that accuracy cannot be guaranteed. Do your own due diligence. I mention M1 Finance a lot around here. M1 does not provide investment advice, and this is not an offer or solicitation of an offer, or advice to buy or sell any security, and you are encouraged to consult your personal investment, legal, and tax advisors. All examples above are hypothetical, do not reflect any specific investments, are for informational purposes only, and should not be considered an offer to buy or sell any products. All investing involves risk, including the risk of losing the money you invest. Past performance does not guarantee future results. Opinions are my own and do not represent those of other parties mentioned. Read my lengthier disclaimer here.
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