Investing in China ETFs: It’s Complicated

Whether or not you believe in any specific countries’ ability to economically eclipse the U.S., it’s common investor knowledge that one should diversify internationally in case sh*t hits the fan in America.

In many cases investing in a good general international index fund, like Vanguard’s Total International Stock Index Fund (VTISX), checks off the global diversification box. Yet for others taking educated bets on particular regions may be ultimately more lucrative. Given China’s fast-growing economy, I wanted to do a bit of research into investment opportunities for the average investor to take advantage of China’s potential reward. Of course, investing in a young market has its many risks. My goal is to educate myself on these so I can invest wisely in the country (I already own a small amount of HAO — China Small-Cap ETF, but nothing too significant yet.)

An Economy Lesson (Sort Of)

China’s economy is fascinating. In fact, it has grown at an average rate of 10% over the last 30 years. I never took a basic econ class (hey econ friend let’s discuss one day so this makes more sense to me), so do your own research and take mine with a grain of salt, but according to this chart China ranks in at 10th as the country with the most GDP growth.

The Economist even has an interactive feature where your can guess what year China’s economy will overtake America’s. And  you have the BBC noting that the U.S. GDP growing at just 3% per year won’t be able to keep up with China’s growth, even if it slows to 7%.

If you understand economics better than I do, that BBC article is definitely worth a read. It goes into logic behind why China will surpass the U.S. and when, specifically highlighting how it’s hard to compare the two economies since they are so different and based on exchange rates.

Whether or not you believe China will surpass the U.S.A. in terms of economic power, everyone agrees that the country has shown significant growth, attracting the eye and wallet of investors.

Meanwhile, we know that China owns a crap-ton of U.S. debt. Yes, that’s an actual metric according to this gal who has never taken an econ class. Well, apparently the Treasury department has no idea exactly how much of our debt China owns (according to The Wall Street Journal, not some podunck financial blog) — so it MUST be a crap ton. OK, so I don’t get how it all works, but this About.com article seems to sum up the reasons why China has taken on so much of our debt. If someone wants to explain this to me better in the comments, I’d appreciate it. My understanding is basically we buy too much stuff from China and China doesn’t buy a lot of stuff from  us, so they need to take on our debt instead. I feel like I’m missing a step there but in any case I know it doesn’t sound too good for the U.S. (Damn, I wish I took an econ class.)

In any case, U.S. investors can invest in Chinese companies if they believe the average growth of these companies will outpace the growth of American companies. One can also invest in individual Chinese stocks, but this post is focuses on diverse funds which cover the Chinese markets. There are a lot of them and more seem to be popping up daily due to investor demand.

China Fund Investment Opportunities

Besides the standard small-, mid-, and large-cap segmentation, Chinese funds are unique in that most of them are sold on U.S. stock exchanges in U.S. dollars. Shares in mainland China-based companies that trade on Chinese stock exchanges are called “A-shares.” What’s hot right now, apparently, is ETFs which let American investors get a piece of the action of these A-shares.

In any case, there are a large number of ETFs available for investors looking to get in on the China action while somewhat diversifying (see the full list here at ETF database.)

FXI seems to be the standard and largest China ETF, but many have pointed out that largest isn’t necessarily best. Why? The fund invests only in 26 companies AND 53.5% of them are in financials (though it is changing to another index to diversify the fund more this fall.) It turns out that China financials aren’t performing well at the moment, and some are bearish on them for the long term. Bearish on financials but still want a piece of the action in China? The WisdomTreet China Dividend Ex-Financials Fund (CHXF) would be the ideal play for you. Or if you love the financials go for CHIX which just tracks the Chinese financial market… or you can short it, if you know how to do fancy trades like that (I don’t, yet.)

Other popular options for non A-share ETFs with exposure to China include the iShares MSCI Emerging Markets ETF (EEM) and the Guggenheim China Technology ETF (CQQQ) if you want to just play the tech sector.

Yet  none of these offer A-shares. ETF analyst Dennis Hudachek notes, ““I like A-shares because they’re just less correlated with the global markets, so this massive pool of global liquidity can’t necessarily tap that market freely.” It seems the A-shares actually provide the international diversification one would want if, say, the U.S. economy unexpectedly slums for a while.

ETFs which allow U.S. non-institutional investors to purchase China A-Shares include:

ASHR: The Deutche X-trackers Harvest CSI 300 China A-Shares ETF follows the CSI 300 Index — aka, the 300 largest and most liquid stocks in the China A-share market. It’s total expense ratio is a painful 0.82%, so if you’re going to play this you better be bullish.

ASHR
24.83
+0.07 (0.28%)

ASHS: For those who love risk, the Deutsche X-trackers Harvest CSI 500 China A-Shares Small Cap ETF could be a fit. The index aims to track 500 small cap companies listed on the Shanghai and Shenzhen stock exchanges. Like its large-cap sibling ASHR the total expense ratio is .82%

ASHS
30.44
+0.13 (0.43%)

CHNA: this fund — the PowerShares China A-Shares Portfolio —  invests primarily in Singapore exchange FTSE China A 50 index futures. This is supposed to be a less risky. If you understand why, please explain this to me in the comment section below. 🙂

CHNA
25.86
(%)

KBA: the KraneShares Bosera MSCI China A Shares ETF is focused on investing in 85% of the market by capitalization. With an 0.85% expense ratio, this one isn’t cheap either. It’s up 11% in one month as of today, however, so short-term investors are probably having fun with this one.

KBA
27.94
-0.04 (-0.14%)

PEK: The Market Vectors ChinaAMC A-Share ETF tries to replicate the performance of the CSI 300 index, a diversified index consisting of 300 A-share stocks listed on the Shenzen and/or Shanghai Stock Exchanges. This  has an expense ratio of .72%.

PEK
38.68
+0.11 (0.29%)

CN: In addition to the options above, if you aren’t sure about A-shares but want some exposure to them, the db X-trackers Harvest MSCI All China Equity Fund (CN), which started in April 2014, offers exposure to China A-shares in addition to B-shares, H-shares, red chips, p-ships, ADRs, and securities of Chinese companies listed in the US and Singapore (don’t ask me what all that means, but it sure sounds diversified.) But it basically invests in ASHR and ASHS to get its A-Shares plus a bunch of other Chinese businesses. At a .60 expense ratio it’s still expensive but not as bad as going all A-shares, which have even higher fees.

CN
29.97
+0.01 (0.03%)

While I research all of these options, I wonder if for long-term investing sticking with the general vanguard fund, with its low expense fee and broad diversified international investments, is the best bet. I enjoy as a hobby investing in individual country ETFs so I can watch them and learn about their economies. However, the straight A-share plays may be too risky. I think I’m going to test out CN to see how that one goes.

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