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Difficulty Level: Moderate
1) ETFs usually aim to replicate the performance of a specified index…
2) But the returns for China stock indices can vary WIDELY
3) The returns differ because each index’s composition differs
4) IQ’s opinion: Pick an index to track based your investing purpose
For exposure to:
- China tech: MSCI China Index
- China’s growing domestic consumption: CSI 300 Index or MSCI China A Index
- China’s State-Owned Enterprises: FTSE A50 Index
- Converging valuations between A/H shares: HSCEI Index
5) We’ve shortlisted ETFs you could use to track each index
They have been selected on the basis of larger market caps, lower total expense ratios, tighter bid-ask spreads.
- MSCI China Index: Use iShare Core MSCI China ETF (2801 HK) or iShares MSCI China ETF (MCHI US)
- MSCI China A Index: Use iShares MSCI China A ETF (CNYA LN)
- CSI 300 Index: Use ChinaAMC CSI 300 Index ETF (3188 HK) or Xtrackers Harvest CSI 300 China ETF (ASHR US)
- FTSE A50 Index: Use CSOP FTSE China A50 ETF (2822 HK)
- HSCEI Index: Use Hang Seng China Enterprises Index ETF (2828 HK)
If you find this article useful, do feel free to check out our other ETF and Mutual Fund related articles too!
- Ultimate Stock ETF List for SG Investors
- SGX-listed Stock ETFs: Which are good enough for our readers?
- SGX-listed Bond ETFs: Which are good enough for our readers?
- China Tech: The best ETFs and Stocks to invest in
- Ultimate List of LEVERAGED Stock ETFs
- When to use Active Mutual Funds vs Passive ETFs
- Ultimate List of Mutual Funds for SG Investors
Short recap on what’s an ETF
An Exchange-Traded Fund (ETF) is a basket of securities (e.g. stocks or bonds or futures) that one can buy/sell on an exchange.
ETFs usually aim to replicate the performance of a specified index. You can think of indices as data references, while ETFs are actual investment vehicles you can purchase/sell. For instance, the S&P 500 is a stock index, while the SPDR S&P 500 (ticker: “SPY”) is an ETF that tracks the S&P 500.
Best China ETF? You need to choose your index first
Same country, different returns. ETFs typically track an index and the returns from the different China stock indices yield vastly different results across different time periods. And if you thought that the difference is only a few percentage points, think again…
Here’s an example. From 2014-2015, CSI 300 Index outperformed MSCI China Index by 67 percentage points!
This outperformance reversed in subsequent years! From 2016 to 2018, it was MSCI China Index that outperformed CSI 300 Index by 42 percentage points cumulatively.
So… choosing an index is very important! Evidenced by the above charts, the question of which China stock index to track may potentially be even more important than your decision to invest in China stocks over perhaps US stocks.
Key factors to consider when choosing an index
Here are key factors to consider when looking at China stock indices:
- Proportion of Onshore China Shares (A-shares) vs Hong Kong listed shares (H-shares) vs US Depository Receipts (ADRs)
- Proportion of Large vs Small/mid cap stocks
- Divergence in Sector / Industry Allocation
- Stock concentration within the Index
The indices can vary a lot on these metrics, as seen in the following tables comparing the five China stock indices we are looking are — MSCI China, MSCI China A, CSI 300, FTSE A50, and HSCEI.
Source for all three graphics: Aug/Sep 2020 index factsheets and index provider’s webpage.
Historical performance of these indices
The strongest performer is… From the below chart, we see that MSCI China Index has been the strongest performer, particularly in the last 5 years. This is because it is the only Index mentioned so far that includes ADRs. Many of the ADR listings are blue-chip China tech companies and as we can see in the following chart below, majority did well particularly between 2016 to early 2018.
30 November 2015 was a historic point for the MSCI China Index, as a total of 14 ADRs including Alibaba, Ctrip.com, Qunar, New Oriental Education, Baidu and JD.com were officially included in.
The InvestQuest’s View
For investment purposes, the decision on which Index to track really boils down to your investment rationale:
- For exposure to China tech, go for an ETF tracking MSCI China Index
- For onshore exposure with bias to China’s growing domestic consumption, go for the CSI 300 Index or MSCI China A Index
- For onshore exposure with a slant towards on China’s SOEs (state-owned enterprises), which can benefit from favourable policy reforms, go for FTSE A50 Index
- To play on converging valuations between A/H shares (where H-shares typically trade at a discount to A-shares), go for the HSCEI Index
So which ETFs would I use? I have listed below what are the ETFs I would consider in using to track the above-mentioned five indices. They have been selected on the basis of larger market caps, lower total expense ratios, tighter bid-ask spreads.
Do note that for Singapore investors, all else equal, it is better to buy a HK or Ireland-domiciled ETF if you are planning to invest for the long-term. Choosing to invest in China stocks via US-domiciled ETFs will subject you to a 37% effective dividend withholding tax, which is undesirable (for more details, you can read our article on dividend withholding taxes).
Wrapping up. While no one knows for sure how well the Chinese stock market will do, what’s for certain is that with China set to become the biggest economy in the upcoming years, it is a market that warrants much attention.
If you find this article useful, do feel free to check out our other ETF and Mutual Fund related articles too!
- Ultimate Stock ETF List for SG Investors
- SGX-listed Stock ETFs: Which are good enough for our readers?
- SGX-listed Bond ETFs: Which are good enough for our readers?
- China Tech: The best ETFs and Stocks to invest in
- Ultimate List of LEVERAGED Stock ETFs
- When to use Active Mutual Funds vs Passive ETFs
- Ultimate List of Mutual Funds for SG Investors
I know you did a separate article on HK&IR-Domiciled when evaluating ETFs. But it would be best if these China ETFs are also updated with domiciles (not only the trackers) so your readers can choose which exact ETFs to choose
Thanks for the feedback! I will be sure to add that in during the next update 🙂
Have a great weekend!
Hi Fong, just wanted to let you know that I have updated the article with your suggestion of adding in the domicile as well. Cheers.
Instead of MCHI US, do you think 3169 HK vs 2801 HK would be more suitable for Singaporeans?
Hi Fong, among the three ETFs at the moment, I would be LEAST keen on 3169 HK (Vanguard FTSE Total China Index ETF). The market cap is still very tiny at US$33m equivalent, which results in very low trading liquidity (US$120k daily average volume) and consequently a wider bid-ask spread (~0.5%).
For short-term trades, I would prefer MCHI US (iShares MSCI China ETF) because the trading liquidity is ample (US$275m daily average volume), so the bid/ask spread is only 0.01%. The main downside to MCHI US is that the total expense ratio is on the higher side at 0.59% and the withholding tax implications that you brought up.
Hence if your intention is to hold the ETF for the longer-term, I would say 2801 HK (iShares Core MSCI China ETF ) would be optimal, since it has a relatively low expense ratio of 0.2% and much less negative impact from withholding taxes due to its HK-domicile. The main downside vs MCHI US is that the bid-ask spread is wider at 0.43% (which makes it less ideal for short-term trading).
Hope this clarifies.
Hi Peter, nicely done here
Thanks Abhi!
Hi! Thanks for this blog post! It’s a really handy resource!
I’ve been looking at 2801.HK to gain some lower cost exposure to the Chinese market, but I’m a bit nervous about Hong Kong. I’m a relative beginner, and don’t think I know enough about currency risk. Am I better off going with an Ireland-domiciled ETF, even at higher cost?
Hi! Thanks for this blog post! It’s a really handy resource! I’ve been looking at 2801.HK to gain some lower cost exposure to the Chinese market as part of a long-term investment strategy. However, I’m a bit nervous about Hong Kong, given the uncertain future of the territory and its currency. I reckon in the short term things will probably be fine, but I’m young enough that if nothing terrible happens to me I probably will live to see the end of the 50-year deal that China has made to keep HK autonomous (which, I don’t have to say, really, is even now being threatened). I’m a relative beginner, and don’t think I know enough about currency risk. Am I better off going with an Ireland-domiciled ETF, even at higher cost?
(Sorry. Double-posted this reply, because I realise the first one lacked some background.)
Hi Jim, thanks for the comment.
In my view, you won’t be better off with a Ireland-domiciled ETF vs 2801 HK.
1) For China stocks exposure, using a Ireland-domiciled ETF doesn’t provide advantages from a dividend withholding tax advantage (relative to using a HK-domiciled ETF). I believe both will face the same 10% withholding tax rate on dividends declared by China companies.
2) ETFs do not typically hedge out currency risk, and stock/ETF prices should adjust to a depreciation of HKD (if that is your concern). So, buying a USD-denominated Ireland ETF will not reduce the currency risk in my view. Your true currency risk is actually still going to be RMB. In the scenario that there is a depeg of USD-HKD and HKD depreciates massively against USD, what we should see is that the NAV of 2801 HK will rise at a roughly proportionate amount to the extent of currency depreciation.
A close example would be when Brexit happened (clearly negative for UK companies). However, the UK stock market (FTSE 100) actually rallied in mid-2016 after the announcement, to adjust for the massive GBP depreciation.
Hope this clarifies!
Hi, may I ask what about SGX ETFs such as TID and JK8? As I do not want to expose myself to currency risk. Is TID and JK8 (SGX) better than HK-domiciled?
Hi Lee, even though TID and JK8 are denominated in SGD, you would still be taking currency risk because these ETFs do not hedge out the FX risk of the underlying securities.
For example, the stocks held by TID are a mix of USD, HKD and RMB denominated stocks. Assuming that the stock prices remain constant but USD, HKD and RMB depreciates against SGD, you would then experience a drop in the TID ETF price.
Separately, compared to 2801 HK, TID and JK8 are much less cost-efficient when it comes to their total expense ratio, and bid-ask spreads.
2801 HK: 0.2% TER, 0.32% bid-ask spread
TID: 0.65% TER, 0.95% bid-ask spread
JK8: 2.28% TER, 1.11% bid-ask spread
Thank you for such a comprehensive guide. For 3188 (HKD), there’s also the 83188 CNY-denominated counterpart. Since the ETF consists only of A-shares, what’s the implication if I bought 3188 vs 83188? Whenever given a choice, is it preferable to trade in HKD?
There are a few differences to note.
1) Currency risk. 3188 is traded in HKD and the ETF does not hedge out the underlying RMB FX risk. This means that if the share price of the CSI 300 stocks don’t move, but RMB appreciates relative to HKD, 3188’s ETF price should theoretically move up, while the price of 83188 would be unchanged.
2) Trading liquidity. 3188 is much more liquid (~USD 60m trading volume a day) vs 83188 (~USD 4m trading volume a day). That said, this is less of a concern for individual investors, unless you are an ultra high net worth investor with large trade sizes.
3) Bid-ask spread. This is related to trading liquidity. Since 3188 is more liquid, the bid-ask spread is tighter at ~0.06% vs 83188 at ~0.11%. Again, this difference is less consequential unless you are a high frequency trader or institutional investor.
Overall, I would just go for 3188. For the moment, there seems to be more investment opportunities to use HKD rather than the offshore Yuan. Buying into 3188 still gives you the underlying RMB risk, so you would still benefit if RMB appreciates either way.
Thank you IQ. Your answer opened new aspects I’ve never even considered before.
On another note, I’ve investigated your article and every ETF you listed (and more), and their underlying indexes–I’ve reached a point of exhaustion with regards to which is the better index to put my conviction (and money) in–between MSCI China, MSCI China A and CSI 300. If you had to make a decision and choose one, what would you personally invest in, and why? Or would you maybe pair them?
MSCI China feels the most thoughtful of the three–but Alibaba and Tencent make up about 30% of it!
MSCI China A too sounds like they’ve captured a better range of A-shares–but if one were planning to say, invest in EIMI, wouldn’t it just be a subset of MSCI Emerging Markets?
Finally there’s CSI 300–I would have jumped into it if I hadn’t gone on to read more about the other two and realised how rudimentarily put together this index was in comparison.
I know it’s not your job to cure anyone’s analysis paralysis, but if you do have a personal POV, I would love to hear it, and learn from how someone with more knowledge and experience would make a decision like this.
Hi, for ETFs to track the CSI 300 index, what are the advantages and disadvantages, between ChinaAMC CSI 300 Index ETF (HKEx:3188), and iShares Core CSI 300 ETF (HKEx:2846) ? Thanks.
Hi Adrian,
Many investors focus only on TER, and might end up concluding that the iShares ETF is more cost-efficient given its lower TER of 0.38% (vs ChinaAMC’s 0.83%). However, I would personally disagree.
ChinaAMC CSI 300 ETF (3188 HK) is much bigger in size with a market cap of US$2.4bn (with avg daily trading volume of US$70mn), vs iShares Core CSI 300 (2846 HK) which has a market cap of just US$46mn (with daily trading volume of US$0.6mn).
As a result of the small AUM and poor trading liquidity of iShares Core CSI 300 ETF, its average bid-ask spread is consequently very wide at 1.44% (as opposed to 0.08% for ChinaAMC CSI 300 ETF). This is a cost that is often missed out by investors.
So, for investors with a short-to-medium term investment horizon who may sell the ETF position within 3 years, I would suggest 3188 HK.
the question i have for 2801 vs 3169 is that the weightage of Tencent and Alibaba is much larger on 2801 and rest of the index is tilted towards these 2 giants. also there seems to be lesser constituents within 2801 . 3169 has 900+ stocks which i feel has good diversification but it seems like the tradeoff is between liquidity/spread vs diversification?
If I’m not mistaken, the key difference would be that 3169 offers slightly more exposure to the Chinese small caps. I personally don’t have a strong view on whether that’s preferred at the moment, but if you look at 3, 5, 10 year horizons, the China Small Caps have underperformed the China Large and Mids Caps quite significantly.
It would also be worth noting that the China Small Caps have rallied more strongly than the China Large and Mid caps year-to-date and in the past 1 year, so an investor would tactically underweight the Small Caps if he/she believes in mean reversion to longer-term norms. Also, my sense is that small caps tend to do better at the start of an economic recovery (which is what we have seen in the US in the past few months), but as the recovery enters a more mature phase (like now), we do start seeing a rotation out of the Small Caps to stocks with “quality-style” factors (which possibly favours large caps).
Since an ETF’s performance would likely be driven by the 80/20 rule (i.e. 80% of the performance would be driven by the largest 20% of stocks held by the ETF), and given that the underlying stocks held by the ETFs are weighted by market cap, I don’t think that the extra 300+ stocks in 3169 would actually tally up to a big enough weightage to add much incremental diversification benefit.
There are two other benefits in using 2801 vs 3169 in my view:
1) 2801 has a lower TER of 0.2% (vs 0.4% for 3169)
2) 2801 has a much larger market cap of US$650m (vs US$50m for 3169). The risk of having a small market cap is that the ETF might not be profitable and have a larger probabilty of closing down in time, which may result in a liquidation at a poor timing. Trading liquidity for 3169 is also going to be poorer.
Hope this helps!