China has become a big deal this year in the markets for reasons both financial and political. The country, along with emerging markets in general, looked quite promising coming into 2021 based on its early emergence from the COVID pandemic, its rapid return to GDP growth and its attractive valuation.

The narrative played out that way for a while. At its peak in mid-February, the iShares MSCI China ETF (MCHI) was up 20% year-to-date, easily outdistancing the returns of both the iShares MSCI Emerging Markets ETF (IEMG), which was up about 12% at that time, and the SPDR S&P 500 ETF (SPY), which had gained 5%.

Since then, the bottom has fallen out for China. The government decided to target many of the country's biggest businesses with a regulatory crackdown to try to inhibit activities that were deemed to be not in the public's best interests. Alibaba (BABA), Tencent (TCEHY) and JD.com (JD) were early recipient's of the Chinese government's attention and their stock prices have been plummeting ever since. All three stocks were down more than 40% from their 2021 highs as recently as a couple weeks ago.

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China ETFs have also taken a beating. MCHI is still roughly 25% off of its earlier year high, not quite as bad as the mega-cap names I just listed, but the poster child for the China crackdown has been the KraneShares CSI China Internet ETF (KWEB), a fund which targets names like Alibaba and Tencent. It's still down nearly 50% from its peak, but as I detailed in a note earlier this week, the fund is up 24% in the past two weeks making it one of the market's biggest rebound stories.

Amazingly, that 60% plunge in KWEB's share price hasn't driven investors away. In fact, it's actually attracted them! China equity ETFs have taken in about $10 billion so far this year and more than half of it has flowed into KWEB. Dip buyers have been very active throughout 2021 and that may be no more apparent than in China ETFs. KWEB has roughly doubled in size this year and is now the biggest China ETF on the market.

Does that make KWEB the best fund for investors though? If not, which of the more than 40 China equity ETFs is a better choice?

Ranking The China ETFs

That's where I can help. The variety of choices makes distinguishing the best from the rest a little challenging. You've probably heard most financial pundits talk about focusing on funds with low expense ratios. That can certainly be a big factor in deciding which ETF to go with (it's probably the most important factor, in my view), but there are a lot of things that could go into make the right choice.

That's where I'm going to try to make things easier for you. Using a methodology that I've developed which takes into account many of the factors that should be considered and weighting them according to their perceived level of importance, we can rank the universe of available ETFs in order to help identify the best of the best for your portfolio.

Now, this certainly won't be a perfect ranking. The data, of course, will be objective, but judging what's more important is very subjective. I'm simply going off of my years of experience in the ETF space in helping investors craft smart, cost-efficient portfolios.

Methodology And Factors For Ranking ETFs

Before we dive in, let's establish a few ground rules.

First, all of the data is used is coming from ETF Action. They have gone through the ETF universe to identify those ETFs using a China-focused equity strategy. There are more than 40 that qualify and we'll be using their categorization as a starting point. Many thanks to them for opening up their vast database for my use.

Second, let's run down the factors I used in the ranking methodology.

  • Expense Ratio - This is perhaps the most important factor since it's the one thing investors can control. If you choose a fund that charges 0.1% annually over a fund that charges 1%, you're automatically coming out ahead by 0.9% annually. You can't control what a fund returns, but you can control what you pay for the portfolio. Lower expense ratios equal more money in your pocket.
  • Spreads - This relates to how cheaply you can buy and sell shares. Generally speaking, the larger the fund, the lower the spreads. Bigger funds usually have many buyers and sellers. Therefore, it's easier to find shares to transact and that makes them cheaper to trade. On the other hand, small funds tend to trade fewer shares and investors often need to pay a premium to buy and sell. Considering expense ratios and spreads together usually give you a better idea of the total cost of ownership.
  • Diversification - Generally speaking, the broader a portfolio is, the better chance it has at reducing overall risk. A fund, such as the Energy Select Sector SPDR ETF (XLE), provides a good example. 45% of the fund's total assets go to just two stocks - ExxonMobil and Chevron. By buying XLE, you're putting a lot of faith in just those two companies. An equal-weighted fund, such as the Invesco S&P 500 Equal Weight Energy ETF (RYE), would score higher on diversification than XLE.
  • FactSet ETF Scores - FactSet calculates its own proprietary ETF ranking for efficiency, tradeability and fit. They basically are designed to tell us if an ETF is doing what it sets out to do. I'm not going to copy and paste that work that they're doing, but there is some influence there to make sure my rankings are on the right path.

There are a few other minor factors thrown into the mix, but these are the main factors considered.

One thing that is not considered is historical returns. Most ETFs are passively-managed and are simply trying to track an index, not outperform. ETFs shouldn't be penalized for low returns simply because the index they're tracking is out of favor at the moment.

I'm ranking ETFs based on more basic structural factors. Are they cheap to own? Are they liquid? Do they minimize trading costs? Do they maintain risk-reducing diversification benefits?

Being in the bottom half of the list doesn't automatically make a fund "bad". It simply means that due to a low asset base, a high expense ratio, a concentrated portfolio or some other factor, it poses additional costs or downside risks.

Top China ETF Rankings For 2021

You might typically expect to find the ETF heavyweights, such as Vanguard, at the top of these rankings. In many other categories, that will certainly be the case, but the China ETF market is unique. The top of this ranking is actually controlled by mid-size issuers. In fact, it's not Vanguard, BlackRock and State Street sitting atop the list. It's Franklin, KraneShares, WisdomTree and Deutsche Bank owning the top 4 spots.

And, no, KWEB isn't one of them.

Top China ETF Rankings

Top China ETF Rankings

If you're not familiar with the Franklin FTSE China ETF (FLCH), you're not alone. With a modest $130 million in assets, it's only the 14th largest China equity ETF out there. But the reason it sits at #1 is pretty clear - its low expense ratio. Out of the 43 other ETFs in this category, all but two - the Global X MSCI China Large-Cap 50 ETF (CHIL) and the WisdomTree China ex-State Owned Enterprises ETF (CXSE) - even have expense ratios that are less than DOUBLE that of FLCH. FLCH's top ranking is mostly built on its low expense ratio. Outside of that, spreads are at least decent, if not tight. Diversification is average, but it operates fairly efficiently.

The rock star of the group, KWEB, only lands at #9 in my rankings. It's a huge fund now, so it's very liquid, but it also has one of the highest expense ratios among all China ETFs. With around 65% of the fund's assets committed to just the top 10 holdings, it's also one of the top-heaviest. Neither of these facts scored the fund any bonus points.

Among the other big name funds, the iShares MSCI China ETF (MCHI) comes in at #5, a sort of middling result for a fund that is so much bigger than most of its peers, while the iShares China Large-Cap ETF (FXI) lands at a downright disappointing #10. In the case of FXI, high fees are also a killer.

Among this group of 20, I tend to favor CXSE and the Xtrackers Harvest CSI 300 China A-Shares ETF (ASHR) the most. CXSE's objective of avoiding the country's less capitalistic businesses makes it a better growth vehicle, while ASHR brings the high potential A-share market to investors.

Most of the remaining funds are too small and/or thinly traded to be truly viable options at this point. That's the theme among the ETFs landing outside the top 20 as well.

Top China ETF Rankings

Top China ETF Rankings

Top China ETF Rankings

Top China ETF Rankings

There are a lot of sector specific funds here, including a number from Global X. I think it's nice to have the Chinese sector options available, just like here in the United States, and Global X is one of my favorite ETF issuers, but these funds just haven't caught on. I don't know if they'll ever be at risk of being liquidated, but six of them have $6 million or less under management. In most cases, that would put them in the high risk category.

I've always found the Loncar China BioPharma ETF (CHNA) kind of interesting. Biotech is a real high growth space and there's a lot of innovation coming out of China nowadays. It's another one that just hasn't gotten a lot of attention, but I can see this one doing well down the road.

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Also read:

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