How to Choose a China ETF

At Top Gun Options one of the foreign countries whose ETFs we trade is China. China is the second ranking economy in the world and the dominant industrial power. Despite the US and China sliding into a new Cold War we expect China’s economy to continue to grow which makes it a good long-term bet for investors as well as traders of LEAPS options. There are seventeen ETFs representing Chinese stocks that trade in the USA. Knowing how to choose a China ETF is the first step to trading options and profiting from China’s continued economic rise.

Investing in China

China has experienced a phase of economic growth similar to that of the US from after the Civil War into the mid-twentieth century. While the country has a communist government and much of its industry is state-owned, there are many publicly traded companies like NIO, Tencent Holdings, and Alibaba. Roughly 250 Chinese companies trade as American Depositary Receipts in the USA. However, there are issues with accounting transparency of these companies that could affect their ability to trade in the USA. One way around this issue is to invest in or trade an ETF that represents many of these stocks or sectors. Another advantage of choosing an ETF is that one gets access to broader market exposure with an ETF than with just one or two stocks.

China ETF Evaluation

Since your reason for investing in a China ETF is to make money, the first way to evaluate an ETF is to look at one, three, five, and ten-year returns. Because an ETF that is overly traded (churned) eats up profits with overhead it is wise to look at fund expenses as well. Funds with the lowest expense ratios are commonly among the highest-ranking for profits. Then one needs to look at the structure of the ETF. Traders typically want an open-ended fund that allows one to buy and sell during market hours as opposed to unit investment trusts or grantor trusts. Last but not least one should look at the mix of stocks in an ETF as some cover individual market sectors while others cover the larger market. Subcategories to consider are dividends, asset flows, risk, expenses, and momentum.

China ETFs by Market Performance as of Mid-2022

The top three performers as of mid-2022 among China ETFs are these:

  • Global X MSCI China Energy ETF (CHIE), up 42.62%
  • Deutsche X-trackers Harvest CSI 500-A Shares Small Cap ETF (ASHS), up 18.38%
  • Global X MSCI China Industrials ETF (CHII), up 12.90%

The Global X MSCI China Energy ETF includes Chinese energy stocks ranging from small to large capitalization. This ETF is up about 40% over the previous year, provides a 1.89% dividend yield, and has traded at its best in the last year compared to the 1% to 7% range over the previous ten years. This is a small fund that is thinly traded so traders should be aware of liquidity risk.

The Deutsche X-trackers Harvest CSI 500 China-A Shares Small Cap ETF tracks the Chinese CSI 500 index. This ETF manages $37 million in assets and is up 18% over the previous year. Its annual dividend yield is 0.77% but previous returns (five years) are as high as 23%. You can think of the CSI Index as a Chinese S&P 500 making this EFT representative of the broader Chinese market.

The Global X MSCI China Industrials ETF includes mid and large-cap parts of the MSCI China Industrials 10/50 Index. It is up 12 percent over one year and 7% over ten years with a dividend yield of 0.86%.

Global X MSCI China Industrials ETF is an exchange-traded fund that seeks to invest in large- and mid-cap segments of the MSCI China Industrials 10/50 Index by using a full replication technique. CHII was formed on November 30, 2009 and is domiciled in the United States. Like the other leaders in returns this ETF also trades thinly creating liquidity risk for traders.

Trading the FXI

Although the three ETFs mentioned here performed well over the last year, they pose a risk in terms of liquidity. A better choice for traders that we trade here at Maverick Options is the FXI which includes large cap China stocks and has about $5 billion under management. This ETF can be traded similarly to how one trades ETFs that track the S&P 500 as it is more closely tied to the Chinese economy.