Growth Potential of China ETFs

ETFs with exposure to China have been outperforming of late

After an abysmal 2022, the following China ETFs have recovered substantially from October lows.

• iShares MSCI China ETF (MCHI) - ~+45% from October low
• KraneShares CSI China Internet ETF (KWEB) - ~+75% from October low
• iShares China Large-Cap ETF (FXI) - ~+44% from October low

Recovery optimism has taken hold as investors see a clear path to the end of covid-lockdowns, and their associated impact on the Chinese economy. While there may well be a surge in Covid cases following the ending of some restrictions – not to mention increased nationwide travel over the Chinese New Year holiday season - the rest of the world has already seen this playbook unfold; an initial uptick in cases being met with eventual herd immunity.

Reasons for the outperformance of China ETFs

The majority of this outperformance is likely to be attributed to optimism from investors who are betting on the reopening unfolding throughout China, jumpstarting the massive economy. While the path may be very bumpy, investors seem to be willing to overlook short-term volatility associated with two key factors:

• Covid case surges (increased hospitalizations/deaths)
• Continued weakened property sector

Overall, the end of the Covid-Zero policies marks a turning point for the country as more than two years of restrictions have dampened the country’s growth outlook significantly.

Outlook for 2023

There are numerous segments of the Chinese economy which could make a turn for the better in 2023, this includes:

1. Uplift to China’s overall GDP growth
2. Reduction in strain on labor markets
3. An end to PPI disinflation (latest print was -1.3% y/y)
4. Support to CPI inflation (latest print was only +0.6% y/y)
5. Potential cuts to interest rates

All of these factors point to continued outperformance for Chinese stocks.

ETFs to play the China reopening

Earlier, we highlighted three ETFs that have been outperforming from October lows. Depending on your individual risk tolerance, all three funds provide a convenient way to gain exposure to the (slow) reopening of the world’s second-largest economy.

iShares MSCI China ETF (MCHI)

This ETF from BlackRock provides exposure to 631 large and mid-sized companies strictly based in China. The ETF is a highly diversified ETF which is heavily weighted in the Consumer Discretionary (31% of the total market value), Communication (19%), and Financials (15%) sectors.

• AUM: $8.97 billion
• Expense Ratio: 0.58%
• 1mo Flows: +$540 million
• 1mo Performance: +12.3%

KraneShares CSI China Internet ETF (KWEB)

KWEB from KraneShares provides exposure to companies focused on internet, and internet-related, technology within China. This ETF, while more exposed to more volatile tech names, provides more upside potential at the cost of greater risk. Some of its largest holdings include Tencent Holdings (11% of market value), Alibaba (10%), Meituan (7%), and JD.com (6%). 

• AUM: $7.61 billion
• Expense Ratio: 0.69%
• 1mo Flows: +$163 million
• 1mo Performance: +12.9%

iShares China Large-Cap ETF (FXI)

FXI from iShares is a “safer” option for investors as it provides exposure to less volatile large-cap companies within China. It holds 50 of the largest Chinese stocks, and is also heavily weighted to Consumer Discretionary, Financials and Communication sectors, with a greater accent on Financials. 

• AUM: $6.06 billion
• Expense Ratio: 0.74%
• 1mo Flows: +$256 million
• 1mo Performance: +12.7%

Data as of January 18, 2023.

Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.