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What is a China ETF?

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  • Written By: Andrew Burger
  • Edited By: A. Joseph
  • Images By: Martin, Chungking, Pavalena
  • Last Modified Date: 22 January 2020
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A China Exchange Traded Fund (ETF) is a fund that is dedicated to investing shareholders' capital in China's financial markets. Broadly defined, this might include investing in Hong Kong, Macau and Taiwan's financial markets, as well as those of the mainland, the People's Republic of China. A China ETF is most often an equity fund, meaning that it invests in the shares of companies listed on China's stock exchanges, though some Chine ETFs are dedicated to investing in Chinese debt securities, such as government and corporate notes and bonds, real estate or the Chinese currency, the yuan or renminbi. Like all ETFs, a China ETF is passively managed, meaning that it does not have a portfolio manager actively selecting stocks and allocating the fund's capital. Rather, it is designed to track the performance of a publicly available index, such as the Financial Times Stock Exchange (FTSE)/Xinhua China 25 Index.

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A relatively large number of China ETFs have been listed on United States stock exchanges, and they span a wide range of investment types, indexes, strategies and objectives. China began moving toward something of a capitalist economic model by privatizing state companies and opening its economy to foreign trade and investment in the late 1980s. Industrialization and economic development has been rapid and has continued largely unabated since. This has made China attractive to U.S. and other foreign investment companies as well as individual investors. Coincidentally, the invention and rapid growth of ETFs and the introduction of China ETFs has given U.S. investors a relatively simple, inexpensive and effective way to participate in China's ongoing economic development and market liberalization.

Investors need to be aware of the particular risks and potential rewards of investing in China and a China ETF. Politically, and to a greater or lesser degree economically, China remains a communist country, and the state can exert tremendous influence and control over the economy and private sector businesses. The Chinese government also manages and tightly controls its currency, as well as foreign and external investment flows. In addition, rapid industrialization has quickly turned China into a net importer, in some instances the world's largest importer, of raw materials such as iron and copper. As such, its economy is particularly vulnerable to rising prices for these commodities.

There also are factors specific to a China ETF that should be considered before one invests. One China ETF might invest only in the shares of a certain number of large-cap companies, but this could mean a heavy investment in companies in the financial sector, such as banks and insurers. Another China ETF might heavily invest in property developers, owners, managers and real estate investment trusts — a sector of the economy noted almost as much for its high volatility as its impressive gains.

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