TrackStar’s Top Picks: Best 5 China ETFs

After two decades of growth, China faces serious challenges.

Young adults can’t or won’t work, while the property bubble bust took down a massive source of household wealth.

China’s government slashed interest rates in late September, hoping to lower mortgage rates and boost consumption.

The news triggered a +25% run in the Hang Seng Index while the Shenzhen jumped nearly 40%.

According to our TrackStar data, financial pros and traders scrambled to catch up as search volume across Chinese listed companies and ETFs soared.

In the month since, Chinese stocks have given up half of those gains. Yet interest hasn’t fallen much.

Based on search data, we examined the five most popular Chinese ETFs. The iShares China large-cap ETF (FXI) topped the list.

As the data below illustrates, search volume remained elevated since the Chinese government took action.

Source: InvestingChannel TrackStar Data

FXI is an excellent ETF that can gain exposure to the Chinese stock market.

However, it’s essential to understand how these Chinese ETFs work. Because not all of them invest in China as you think they do.

Key Facts About SMH

• Net assets: $10.4 billion
• 12-month trailing yield: 2.16%
• Inception: October 5, 2004
• Expense ratio: 0.74%
• Number of holdings: 52

China ETFs come in two main varieties: those that invest in the mainland and those that invest in Hong Kong.

FXI holds the 52 largest companies on the mainland, with the holdings weighted based on market capitalization.

Some of the companies listed, such as Alibaba, are on both the Shenzhen or Shanghai Index (mainland) and the Hang Seng Index (Hong Kong).

Source: iShares

For many U.S. investors, ETFs like the FXI are the only way to own a piece of these Chinese companies.

Of the 53 companies in the FXI, nearly 40% are consumer discretionary, with financials at just under 30% and communication in third at 16%.

You can see that technology stocks are barely represented in the FXI.

Source: iShares

Performance

After peaking in 2017 and again in 2021, Chinese stocks lost as much as two-thirds of their value.

Until recently, we’ve seen ANY life from the FXI or any Chinese ETF.

Source: iShares

Despite the latest run, the FXI has barely been up over the last decade and has lost money for the past five- and three-year stretches.

Competition

As mentioned, you can invest in the mainland or Hong Kong. The top ETFs generally hold a mixture of both.

• Direxion Daily China 3x Bull Shares (YINN): Tracks the FTSE China 50 Index with 3x daily leverage. Amplifies gains by tripling exposure to Chinese large-cap stocks. Market cap-weighted.
• KraneShares CSI China Internet ETF (KWEB): Follows the CSI Overseas China Internet Index. Focuses on China’s internet and e-commerce companies. Uses market cap-weighting.
• Direxion Daily China 3x Bear Shares (YANG): Seeks 3x inverse daily returns of the FTSE China 50 Index. Provides leveraged bearish exposure to Chinese large-caps. Market cap-weighted.
• iShares MSCI China ETF (MCHI): Tracks the MSCI China Index. Broad exposure to large- and mid-cap Chinese companies. Market cap-weighted.

YINN and YANG are the only two ETFs listed here that exclusively track Hong Kong-listed companies.

All of these ETFs come with higher expense ratios than you find with U.S. market ETFs. The leveraged ETFs come with the highest costs and are not suitable buy-and-hold investments, as you can see from the five-year return.

Our Opinion 10/10 

The FXI is an excellent ETF to gain exposure to large-cap companies in China. Its fees are reasonable, and there’s plenty of liquidity, including options.

However, if you want a more diversified ETF, the MCHI comes with a lower expense ratio and nearly 10x the number of companies in its portfolio, including mid-caps.

You can’t really go wrong with either.