China stocks are rebounding: How to invest in the recovery with ETFs

What happened?

There was a lot of discussion about the surge in Chinese stocks in the Beansprout community this week. 

Indeed, Chinese stocks saw the most significant gains in a week since 2008, following a slew of stimulus measures announced to boost the Chinese economy. 

Earlier, we shared that there are some green shoots starting to emerge in the Chinese economy, with manufacturing picking up and policies announced to support the property market. 

Clearly, investors appear to be sensing that the worst may be over.

If you are wondering how to gain exposure to the economic recovery, I will share some popular exchange traded funds (ETFs) that offer exposure to Chinese stocks. 

Why China ETFs?

An ETF is a basket of securities that you can trade on the stock exchange, just like a regular stock. 

China ETFs focus on Chinese companies, offering investors exposure to China’s market without needing to buy individual Chinese stocks. 

Instead of trying to pick winners and losers yourself, you can invest in one ETF that covers a wide range of sectors in China, from technology to manufacturing to consumer goods. 

It offers investors a way to diversify and tap into the growth of China’s economy while spreading out risk across multiple companies. 

Some of the most popular China ETFs include the iShares MSCI China ETF and iShares Hang Seng TECH ETF.

What to consider when buying China ETFs?

With so many China ETFs to choose from, you might be wondering how we can select one best suited for our portfolios. 

There are a few factors we would consider, and these would include:

1. Index methodology and sector exposure
2. Dividend yield 
3. Fees and charges 
4. Listing exchange

#1 - Index methodology and sector exposure 

One of the most important factors is to understand which index the China ETF tracks. Broad indices like MSCI China tend to be better diversified across sectors and includes US and Hong Kong listings, while narrower indices like the Hang Seng Tech invests in a concentrated portfolio of tech stocks and face concentration risk.

Among the ETFs listed above, the iShares MSCI China ETF (MCHI) tracking the MSCI China Index offers the broadest diversification to China. The ETF tracks more than 700 companies across China A shares, H shares, and ADRs.

What about A-shares? Well, we have the iShares FTSE China A50 ETF (2823) that tracks the FTSE China A50 Index. This ETF tracks the 50 largest companies in mainland China, trading on the Shanghai and Shenzhen Stock Exchanges, including companies like BYD and Kweichou Moutai. 

Some investors may also look for China ETFs with higher weightings in new economy sectors, such as the tech sector. 

HST tracks the 30 largest tech companies listed in Hong Kong, which provides exposure to innovative companies with strong research & development investment, high revenue growth, and themes such as cloud, e-commerce, fintech and internet. There is a 8% cap on individual constituent weighting. 

On the other hand, KWEB tracks the CSI Overseas China Internet Index, which consists of China based companies whose primary business or businesses are focused on internet and internet-related technology. It is capitalisation-weighted and invests in companies listed in both the US and Hong Kong. 

Between the two, the HST’s individual weight cap and limitations on the investment universe to only HK-listed companies may be less diversified.

#2 - Dividend yield

Many China ETFs focused on growth and technology stocks may not offer high dividend yields., but ETFs tracking value or income-oriented indices, such as 2823 and SHD, could provide higher dividend payouts.

2823 tracks the FTSE China A50 index which includes the 50 largest companies in mainland China, trading on the Shanghai and Shenzhen Stock Exchanges. It distributes dividends once a year in December.

SHD tracks the SSE Dividend Index, which includes 50 high and steady-cash dividend-paying companies listed in Shanghai Stock Exchange such as China Petroleum & Chemical Corporation and Bank of China. 

#3 - Fees and charges

The iShares FTSE China A50 ETF (2823) is one of the cheapest to own ETFs to invest in a basket of China stocks with an expense ratio of just 0.35%. The main reason for its low cost could be its simple methodology of passive investment in the Chinese A-shares market. 

For those looking for slightly more diversification, the MCHI ETF also offers a relatively affordable 0.59% annual expense ratio for its expanded tracking beyond A-shares.

#4 – Listing exchange

Amongst these ETFs, the iShares MSCI China ETF (MCHI) and KraneShares CSI China Internet ETF trade on the NASDAQ, and are accessible through a brokerage that offers trading in US stocks. 

The iShares FTSE China A50 ETF (2823) and iShares Hang Seng TECH ETF (3067) trade on the Hong Kong Stock Exchange, and are accessible through a brokerage that offers trading in Hong Kong stocks. They can be considered by investors who would like to trade these ETFs during Asian trading hours, including the ability to react immediately to the latest developments that may move Chinese stocks. 

The CSOP Huatai-PineBridge SSE Dividend Index ETF (SHD) and Lion-OCBC Securities Hang Seng TECH ETF (HST) trade on the SGX, and can be considered by investors who are looking to buy these ETFs using their SRS funds. 

How do the China ETFs fare on these measures? 

How to buy the China ETFs?

You can buy China ETFs through a regulated broker that offers access in the US, Hong Kong and Singapore stock market, such as Tiger Brokers and Moomoo Singapore. 

Check out our guide to the best online brokerage and stock trading platform in Singapore. 

What would Beansprout do?

If you’re looking for a way to participate in the growth of China through Chinese equities, but are intimidated by individual stocks, consider looking into one of the above ETFs in greater detail depending on your preferences, risk tolerance and expected returns.

If you’re looking for the broadest Chinese equities market tracking, then it’s the iShares MSCI China ETF (MCHI). 

If you’re looking to track a basket of Chinese technology stocks similar to the NASDAQ, the KraneShares CSI China Internet ETF (KWEB) and the iShares Hang Seng TECH ETF (3067) are good considerations. The Lion-OCBC Securities Hang Seng TECH ETF (HST) allows investors to gain exposure to Chinese tech stocks using their SRS funds.

If you’re looking for a dividend focused Chinese equities ETF, the CSOP Huatai-PineBridge SSE Dividend Index ETF (SHD) may offer just that with its index tracking a portfolio of dividend paying stocks.

Are there other China ETFs you would like us to compare? Let us know in the comments below!

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