Niche China ETFs Outperforming Giants

There are many ways in which to own China through an ETF, and sometimes bigger doesn’t mean better returns. 

Reviewed by: Cinthia Murphy
Edited by: Cinthia Murphy

Niche investing isn’t for everyone, especially when narrow slicing and dicing centers on often-riskier emerging markets. But it’s sometimes worth stopping and taking a look at how some narrower-in-focus funds perform relative to their broader counterparts.

Consider China ETFs. Emerging markets have performed well this year, and among them is China, which, according to a Credit Suisse survey, is one of institutional and hedge fund investors’ favorite country picks for 2017.

Recent headlines have been largely favorable for China investors. This week, President Trump and Chinese President Xi Jinping met for the first time, and CNBC reported the talks were “friendly” and ended with both sides “agreeing to tackle trade imbalances.” There was also a recent pickup in manufacturing activity in China—what many see as an indication that the country is seeing economic growth, at least in the short term.

Wide Swath Of China ETFs

In the ETF space, investors have plenty of choice when it comes to owning China. Some of these choices are broad and popular—funds such as the iShares China Large-Cap ETF (FXI) and the Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (ASHR).

But there are also plenty of small, more-nichey funds competing in this segment. Here we take a look at some of the best performances among China ETFs in different segments of the market. Each ETF taps a different pocket of the equity universe.

What’s interesting about each of these funds is that they are all small in terms of assets, and they all seem to struggle with liquidity. They are all, also, outperforming FXI and ASHR for investors who can stomach—or afford—the costs to trade these ETFs.

Global X China Materials ETF (CHIM) is up 26.5% year-to-date

CHIM is one of the only ETFs to offer focused exposure to China’s materials sector through a vanilla, market-cap lens. The ETF owns 24 stocks across sectors like steel, metals and mining, precious metals, chemicals and aluminum. It costs 0.65% in expense ratio, or $65 per $10,000 invested.

The biggest challenge investors face with this strategy is liquidity. With only $3.5 million in total assets, CHIM trades poorly, and with wide spreads currently averaging 1.39%, according to our data. This is a strategy where it’s difficult—and costly—to get in and out. 


Guggenheim China Real Estate ETF (TAO) is up 22% year-to-date

TAO is a single-sector fund that tracks a market-cap-weighted index of Chinese and Hong Kong real estate companies and REITs. The fund tilts heavily toward Hong Kong companies, which represent some 80% of its 58 holdings.

With $37 million in assets, TAO trades with relatively wide spreads, averaging 0.24% and daily volume of about $445,000, on average. The fund costs 0.70% in expense ratio. 

WisdomTree China ex-State-Owned Enterprises Fund (CXSE) is up 20% year-to-date

CXSE is an environmental, social and governance fund that looks to offer broad exposure to China’s equity market, but with a “principles-based” selection criteria that looks to own only Chinese companies that have less than 20% of government ownership. The idea here is that nonstate-owned firms are more efficient and deliver better outcomes to shareholders.

The stocks in the portfolio are weighted by market capitalization.

CXSE is still relatively small, with only $8.6 million in assets, and it struggles with liquidity. Average trading spreads here are 1.48%, making it costly for investors to get in and out. The 71-holding ETF comes with an expense ratio of 0.53%. 

Guggenheim China Technology ETF (CQQQ) is up 18.7% year-to-date

CQQQ is a single-sector China ETF that is organized around market capitalization. The fund owns Chinese tech stocks and it’s pretty broad in scope, owning everything from software names to renewable energy firms to office equipment companies.

With 69 holdings, CQQQ is increasingly popular, as China’s technology sector benefits from consumer trends, a quickly growing e-commerce market and innovation. The fund has $67 million in assets, and it costs 0.70% in expense ratio. 


KraneShares Zacks New China ETF (KFYP) is up 16.6% year-to-date

KFYP is a smart-beta approach to China’s total market. The multifactor, tiered ETF is designed to offer investors exposure to Chinese companies that are expected to benefit from China's current Five-Year Plan. Stocks are selected based on metrics such as momentum and free cash flow.

The fund tilts toward technology—a sector of the economy that’s growing a lot—and away from financials, which tend to dominate broad China ETFs.

As with many other niche ETFs, KFYP struggles with liquidity. Trading spreads in this fund are currently averaging 7%. That’s a massive cost investors would face to get in and out of this ETF. Daily trading volume averages just about $7,000.

Launched in 2013, KFYP has $3.4 million in assets, and costs 0.73% in expense ratio. 

Going back 12 months, these funds each shelled out double-digit returns: 

Charts courtesy of

Risks & Opportunities

China is the second-largest economy in the world, and the biggest emerging market. There’s no ignoring China in an asset allocation plan.

But like many emerging economies, the outlook for China seems to be regularly changing, as risks and rewards get reshaped by domestic themes and ever-changing global trends. Risks abound, as China faces many demand- and supply-side head winds in its pursuit of long-term, sustainable growth.

Earlier this month, Vanguard put out a comprehensive research paper that offers a deep look into what the firm called China’s “tough balance between pace and quality of growth.” That balance hinges, the firm says, on much needed structural reform.


For investors looking for clues as to what China holds in store, Vanguard detailed four possible mid- to long-term scenarios:

  • “Smooth rebalancing” – Vanguard’s most bullish scenario. Chances of this happening: 30-40%.
  • “Hard landing” – It would involve a sharp decline in growth but “with a brighter future.” Chances of this happening, according to Vanguard: 20-30%.
  • “Japan-style stagnation” – A “persistently subdued” growth pace in the long run. Chances of this happening: 25-35%.
  • “Emerging-market-style instability” – The firm’s most bearish scenario, but also the “least likely.” Chances of this happening: 5-15%.

These are merely Vanguard’s views on China’s prospects, and should be taken as such. But if it is right, the key takeaway is there are plenty of risks associated with investing in China right now, as are opportunities and diversification benefits to owning an allocation to China. In Vanguard’s words:

“China is undergoing a remarkable transition and rebalancing from a manufacturing and export-based economy to one based more on service and consumption. This transition will not be without risk and pain. The alarming amount of leverage, growing overcapacity in certain industries, and increasing policy uncertainty amid the inevitable trend growth slowdown pose a rising macro tail risk. Although the near-term risk of a hard landing is relatively low given the government’s deep pocket of policy tools, the true risks lie in the medium to long term.”

There are some 45 China-focused ETFs on the market today, each slicing and dicing the space in its own way. For detailed information on all of these funds, check out our China ETFs channel.

Contact Cinthia Murphy at [email protected]


Cinthia Murphy is head of digital experience, advocating for the user in all that does. She previously served as managing editor and writer for, specializing in ETF content and multimedia. Cinthia’s experience includes time at Dow Jones and former BridgeNews, covering commodity futures markets in Chicago and Brazil equities in Sao Paulo. She has a bachelor’s degree in journalism from the University of Missouri-Columbia.