How to incorporate China within portfolios is one of the most important asset allocation decisions for investors in a generation.

Asia’s largest economy has only just started opening up its mainland stock market to the rest of the world and the opportunities for investors are numerous.

ETFs offer investors the perfect way to access the rapidly developing market. Over the past few years, ETF issuers have started to launch more specific exposures which enable investors to slice and dice the market in a variety of ways.

As we enter the Year of the Ox, the outlook for China is positive with COVID-19 seemingly under control and the continued growth of the country’s middle class.

Here, ETF Stream has selected five of the best China ETFs for investors to consider within their portfolios.

Franklin FTSE China UCITS ETF (FLXC)

For investors looking for exposure to the broad Chinese equity market, look no further than the $107m Franklin FTSE China UCITS ETF (FLXC).

FLXC currently offers exposure to 999 large and mid-cap companies through the FTSE China 30/18 Capped index – which caps the top security at 30% and the rest at 18% – and has a total expense ratio (TER) of 0.19%, the cheapest China ETF on the European market by some distance.

The index includes A-Shares, B-Shares, H-Shares, Red chips, P-Chips, S-Chips and N-Shares. Tencent and Alibaba account for FLXC’s top two holdings with 15.5% and 13.8% weightings, respectively.

FLXC is the only ETF in Europe to offer exposure to this index which has outgunned the MSCI China over the past year, an index a number of European-listed ETFs track.

Highlighting this, FLXC has returned 54.5% over the past 12 months versus 52.7% for the Lyxor MSCI China UCITS ETF (LCCN), as at 11 February.

iShares China CNY Bond UCITS ETF (CNYB)

The iShares China CNY Bond UCITS ETF (CNYB) has captured investor imagination like no other ETF on the European market over the past two years.

Since launch in July 2019, it has gathered $7.9bn assets under management (AUM), making it the largest China-specific ETF in Europe by some distance.

Tracking the Bloomberg Barclays China Treasury + Policy Bank Total Return index, CNYB offers exposure to bonds issued by the Chinese government and Chinese policy banks.

In January, ETF Stream revealed BlackRock changed the index tracking approach to a full replicating one to enable tighter tracking error.Previously, the optimising strategy had left CNYB underexposed to individual policy banks however the changes have led to a more accurate replication of the index.

KraneShares CSI China Internet UCITS ETF (KWEB)

The tech revolution in China is in full swing and the $403m KraneShares CSI China Internet UCITS ETF (KWEB) offers investors the perfect way to access this market.

Tracking the CSI Overseas China Internet index, KWEB currently offers exposure to 44 companies involved in internet-related sectors such as Tencent, Baidu and Meituan.

China’s internet population has a penetration rate of just 61.2%, as at June 2019, versus 89.5% for the US highlighting the huge potential growth involved.

As expected, KWEB has shot the lights over the past year returning 95.2% and is certainly the best tech-focused China ETF on the European market.

HSBC MSCI China A Inclusion UCITS ETF (HMCT)

At 0.30%, the $54m HSBC MSCI China A Inclusion UCITS ETF (HMCT) is the joint-cheapest ETF on the European market to offer exposure to the China mainland stock market.

HMCT tracks the MSCI China A Inclusion index which is a basket of 465 A-Shares, an area of the market where global investors previously had little access to.

No longer an ‘optional extra’: What’s in store for China equity ETFs?

Along with the low fee, HMCT tracks the ongoing inclusion of A-Shares in the wider MSCI Emerging Markets and should benefit from the huge assets that flow into companies every time they are added to the index.

A-Shares have outshone H-Shares over the past year and this is highlighted in the 66.5% returns of HMCT versus just 11% for the Amundi MSCI China UCITS ETF (CC1U) which solely offers exposure to the H-Shares market.

KraneShares MSCI China ESG Leaders UCITS ETF (KESG)

For investors looking for a China ETF with a sustainable tilt, the $29m KraneShares MSCI China ESG Leaders UCITS ETF (KESG) offers the most intense exposure to companies scoring well from an ESG perspective.

KESG tracks the MSCI China ESG Leaders index which is exposed to 139 of the highest scoring sustainable companies out of the 697-strong MSCI China index.

The factor tilt towards momentum and growth companies means KESG has delivered strong returns of 67.7% over the past 12 months versus 52.7% for the wider MSCI China, as at 11 February.

However, KESG does leave investors significantly exposed to two companies in particular, Tencent and Alibaba, which account for 56.5% of the index, as at 29 January.

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