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China ETFs: A Complete Know-How 2022

china etf
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China, the second-largest economy globally, was the powerhouse revolving the world economy back in order after the 2008 financial crisis. China has recorded stunning 2.30% and 8.10% GDP(gross domestic product) growth in 2020 and 2021 during the peak of the Covid-19, while other countries worldwide are suffering single-digit or no growth. 

As an investor, you should not ignore the opportunities abundant in the massive market. Yet, recent events, e.g., the Russia-Ukraine war and the relationship between the US and China, have changed economic fundamentals over the past 2 years. Investors may need more prudent skills in investing in Chinese stocks. 

Financial institutions offer various investment tools to clients who intend to put money into China to work. However, investment restrictions still exist. You may invest in China-specialized ETFs to avoid time and effort in researching and reviewing investment rules unique to the Chinese market. You can save effort by riding on the expertise of China ETF.

What is a China ETF?

As the name implies, a China ETF is an index fund tracking an index relating to china’s enterprises. The investment tools can be stocks, bonds, and derivatives issued by these companies. Besides, an index fund tracks the performance of an index by buying constituents of a designated index; for example, the MSCI Emerging Markets index. Besides a hands-free investing style, you can diversify risks by investing in an ETF because it buys numerous stocks.

Opportunities and Risks

Opportunities

  • China is a critical member of the current economic system globally, and the international monetary fund predicts China’s economy will grow by 5.60% this year. It is a fast-charging economy after the pandemic an investor should not ignore. A China ETF offers an easy and convenient platform for investors to access the important market.
  • China’s capital market is still not fully accessible to international capital. Due to its unique and volatile nature, the market is different from other majors. It is a tightly blended model of economic and political factors as parts of the whole system. For example, state-owned Chinese companies play a heavy role in the system. 
  • Investors need special knowledge and expertise in picking stocks and timing in profiting from trades in the system. China ETF track leading companies from China’s stock market and give investors access to relevant information related to quality companies.
  • If investors want to profit from its economic growth and spare time to research and study the market, ETF is a good start for testing water and learning the market. The constituents of many Indexes the ETFs track comprise essential companies that can diversify your investment risk because they are the pillars of the economy.

Risks

  • US-China trade tension: The Sino-US trade relationship has been rocky since 2018. The US has imposed tariffs and more restrictions on goods imported to the US till now. Economists predict China will have a rough trade relationship with European nations this year besides concerns about the war and intellectual properties. It may affect corporations’ growth and profit. 
  • Strict Covid policy: For over 2 years, the Chinese authority has imposed the most stringent zero-Covid policy, and economists criticize it may have caused a severe impact on economic growth in the years to come.
  • Regulatory crackdown: Chinese authority has launched antitrust and antimonopoly reviews on tech giants like Ants of Alibaba(NYSE: BABA) and Meituan(HKEx: 3690). The tech stocks have suffered heavy losses in recent years. It may take a longer time for them to recover. 
  • Property company’s default: The largest property company in China:  Evergrande(HKEx: 3333) has defaulted on loan and interest payments last year, and so did other property companies in China. As the property industry output has shared 25% of the country’s GDP, it may show some weaknesses and risks in the economy.

etf stock market trading graph

Top 10 performing China ETF

The following table lists the best China ETF listed on the Singapore(SGX) and New York Stock Exchanges(NYSE) for your reference.

ETFs Indexes tracked Expense ratios Year-to-Date returns 1-year return 5-year return Exchanges Yield
KraneShares MSCI China Clean Technology Index ETF (KGRN) MSCI China IMI Environment 10/40 Index(Equity) 0.79% -11.35% 3.11% 68.50% NYSEArca 0.01%
iShares MSCI China A ETF(CNYA) MSCI China A Inclusion Index(Equity) 0.60% -5.86% 4.10% 54.56% BATS(US) 1.02%
Global X MSCI China Energy ETF(CHIE) MSCI China Index(Equity) 0.66% -3.94% -3.13% 15.41% NYSEArca 1.71%
WisdomTree China Ex-State-Owned Enterprises Fund(CXSE) WisdomTree China Ex-State-Owned Enterprises Index(Equity) 0.32% -9.26% -34.36% 56.75% NasdaqGM 0.71%
VanEck Vectors ChinaAMC SME-ChiNext ETF (CNXT) ChiNext Index(Equity) 0.65% -13.04% -12.57% 40.25% NYSEArca 0.01%
XTrackers-MSCI China UCITS ETF(LG9) MSCI China TRN Index(Equity) 0.65% -6.88% 42.95% 26.22% SGX N/A
SPDR S&P China ETF(GXC) S&P China BMI Index(Equity) 0.59% -5.86% -28.59% 18.95% NYSEArca 0.97%
First Trust China AlphaDEX Fund(FCA) Nasdaq China Index(Equity) 0.80% -4.93% -5.52% 22.13% NasdaqGM 3.1%
Global X MSCI China Ultilities ETF(CHIU) MSCI China Index(Equity) 0.66% -15.22% 12.21% 13.37% NYSEArca 3.76%
VanEck Veckors ChinaAMC China Bond ETF(CBON) ChinaBond China High Quality Index(Fixed Income) 0.50% 0.97% 5.10% 13.03% NYSEArca 2.71%

What to consider in choosing a China ETF

  • Types: China ETF comprise different asset classes, e.g., stocks, fixed income, and leveraged products. ETFs with leveraged structures are risky. Currently, the Singapore stock exchange has 13 ETFs available to investors and does not offer leveraged ETFs. Of these, 5 are fixed-income ETFs, and the remaining 8 are stock ETFs. They are valued in currencies of CNY(Renminbi), Singapore dollars, the US dollars. You may look for the US markets where thousands of ETFs are available to ETF investors for more varieties.
  • Returns: ETFs are long-term investment products. You should focus more on long-term performance and less on short-term market fluctuations. Therefore, five-to-ten-year returns are a good indicator of an ETF’s performance. In addition, you should choose an ETF with long operating history rather than a shorter one, if any. An ETF with a longer period may provide more data on its performance and cost structures, giving you more confidence while investing.
  • Expense Ratios: The cost affects your return if an ETF charges a high expense ratio. It is an annual management fee you pay for running a fund. The expense ratio for ETFs is lower than for actively-managed unit trusts. A unit trust may charge a yearly fee of 1.5% or above, while an ETF may collect fees from 0% to 0.94% in Singapore, depending on the asset class. Stock ETFs have higher expense ratios than fixed-income ETFs.

How to Start Investing

As a regional financial hub in Southeast Asia, Singapore is an investment center for locals and multinationals. Therefore, you have to follow procedures to prevent money laundering and terrorism financing. Here are typical steps you need to take and the legal protocols used by most financial institutions in Singapore.

Step 1: Determine a China ETF

First, you should decide on an investment fit for your risk tolerance, investment horizon, and return expectations. Then, you can use the above ETF information to identify one or more suitable funds, or you can consult with your financial advisor in developing a portfolio appropriate to your financial circumstances.

Step 2: Open up a brokerage account

You may be aware that stock exchanges like Hong Kong Stock Exchange, besides Singapore, offer most ETF services to investors. Thus a stock brokerage account or a stock account with a commercial bank is the best venue to buy a China ETF. Brokerages and other financial institutions like banks in Singapore offer comprehensive financial services like stock, bond, and ETF trading. 

Required by regulations, financial institutions should do due diligence on their clients, and you have to provide your details and financial information, including the “Know-Your-Client” process. Once you have your information verified by brokerages, you can fund your account.

Step 3: Fund your account

Nowadays, you have numerous channels to fund your account. An app transfer from a mobile phone can do all the work in a few seconds. You may choose a conventional fund transfer to your brokerage account from your bank. 

Besides, you may have to convert local dollars into foreign currencies like US dollars if you invest in the US market. An ideal currency rate is possible if you get prepared early.

Read on more about the ways of investment in Singapore.

Final Thoughts

China ETFs are the fast path to investing in the Chinese market without hassles. You should not ignore if you are a beginner with little China knowledge or you have a long-term investing plan and want to capitalize on the benefits of the fast-growing economy.

Key Takeaways:

  • Ideal for beginners and long-term investors.
  • You should be vigilant about the inherent risks when investing in China market.
  • CH ETFs in the market have different performance records and expense ratios.
  • Most ETFs are available on the Singapore, New York, and Hong Kong Stock Exchanges.

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