When we first looked into investing in China, we were excited by the potential. After all, it's a massive, rapidly growing economy. Surely that would translate into great returns, right?
But as we dug deeper, we uncovered a puzzling disconnect. Despite China's economic boom, its stock market has significantly underperformed compared to global indices.
In this article, we'll help you navigate the complexities of China ETFs. We'll explain why they might (or might not) be a good fit for your portfolio as a Belgian investor, and explore some alternatives you might want to consider.
Why a China ETF can be a good investment
Invest in a growing economy
A key reason to invest in China ETFs is the access they provide to one of the world's largest and fastest-growing economies. China's economy has been growing fast. Industrialisation, tech innovation, and an expanding middle class drive this growth. This growth presents a fertile ground for investing your money.
China is committed to innovation. It leads the world in e-commerce, digital payments, and renewable energy. This shows the potential for long-term growth. Investing in China ETFs means investing in companies at the forefront of these trends. This could lead to big returns.
Diversification
Another advantage of China ETFs lies in the diversification they offer. By investing in many companies across different industries, you can reduce the risks of putting all your eggs in one basket. The Chinese market is vast and diverse, offering a lot of variety.
An ETF solves the difficulties of buying Chinese stocks
China ETFs also offer a simple way to join the Chinese market. They avoid the complexity and risk of investing directly in foreign stocks. After all, investing in foreign markets often means navigating rules. It also means dealing with currency risks and understanding local markets. China ETFs trade on major European stock exchanges. They remove many of these hurdles, making it easier to invest in China's growth.
How to select a China ETF
In order to choose the best China ETFs for you to invest in, there are some criteria we would stick with as a Belgian investor.
Follows an index
The style of investing based on index funds, also called passive investing, is a superior strategy for most people. There’s no need to spend time analysing individual Chinese companies and stocks, you can just follow an index of companies.
Accumulating ETF
From a taxation point of view, accumulating funds are preferred over distributing funds to avoid paying a 30% tax on dividends.
Low cost
Most ETFs are already low-cost compared to active funds. But when we have the choice between several ETFs tracking the same index, we prefer a cheaper one (all other things being equal). The cost is measured by the total expense ratio (also known as the TER). Note that the TER is usually higher for China ETFs in comparison to globally diversified ETFs because the Chinese market is more difficult to access.
Domiciled in Ireland or Luxembourg
Both countries have special tax treaties with many countries around the world. This makes it fiscally advantageous to invest in ETFs domiciled in Ireland or Luxembourg. You can recognise these by their ISIN code that starts with "IE" (Ireland) or "LU" (Luxembourg).
Traded in €
We only selected funds that are trading in Euro as we don’t want to pay unnecessary currency exchange fees.
Diversified
Diversification is important when investing because it helps to reduce the overall risk. The basic idea behind diversification is to avoid having all your eggs in one basket, so that the impact of a single negative event is reduced. For example, if you only invest in one single Chinese stock and that company experiences a downturn or crisis, your entire investment portfolio will be negatively impacted. However, if you had invested in a China ETF that diversifies across many different stocks from varying industries, the impact of the downturn of that one company not performing well on the portfolio would be less severe.
Size matters
Larger funds are less likely to be shut down.
Replication
Physical replication is preferred over synthetic replication to reduce third-party risk.
The best China ETFs for Belgians
Based on the criteria above, we chose only ETFs that are accumulating and physically replicated.
iShares MSCI China (IE00BJ5JPG56)
This ETF, known by its ticker ICGA, is designed to replicate the performance of the MSCI China index, offering investors diversified exposure to large and mid-sized companies across China. The ETF enables you to tap into the broad spectrum of sectors within the Chinese economy, from technology and consumer goods to finance and healthcare, reflecting the growth and dynamism of China's market. It provides a strategic option for those looking to invest in the expansive potential of the Chinese economy through only one fund. The biggest companies are households names like Tencent and Alibaba which make up over 20% of the ETF.
Managed by iShares, the ETF maintains an annual expense ratio of 0.28%. However the ETF has not performed particularly well since its creation in 2019, reflecting the recent issues of the Chinese economy. Based on historical data of the MSCI China, it has seen many up and downs since 1992:
iShares MSCI China A (IE00BQT3WG13)
36BZ aims to track the performance of the MSCI China A Inclusion index, focusing exclusively on A-shares traded on the Shanghai and Shenzhen stock exchanges. This ETF provides investors with direct exposure to over 500 companies. It invests in Chinese A-shares, which are shares that are typically accessible only to local investors or via specific investment schemes. Unfortunately, the names that make up the ETF aren't entirely household names unless you live in China.
Created by iShares in 2015, this ETF has an annual expense ratio of 0.40%. It offers a unique opportunity for you as a Belgian investor to engage with the domestic Chinese equity market, covering a diverse range of sectors.
Franklin FTSE China (IE00BHZRR147)
FLXC is engineered to emulate the performance of the FTSE China 30/18Capped index, which encompasses a broad range of Chinese equities, including A-shares traded on the Shanghai and Shenzhen stock exchanges. What makes this ETF stand out is that it has a variety of companies included:
- H-shares: shares of companies incorporated in mainland China that are listed on the Hong Kong Stock Exchange)
- P-chips: companies that are incorporated outside mainland China, typically in places like the Cayman Islands or the British Virgin Islands, but that conduct most of their business in mainland China. They are listed on the Hong Kong Stock Exchange and their shares are available to international investors. The "P" in P-chips stands for "private" as these companies are usually privately owned.
- N-shares: shares of companies based in mainland China that are listed on American stock exchanges, such as the New York Stock Exchange (NYSE) or NASDAQ. These shares are issued by companies incorporated outside mainland China, often in jurisdictions like the Cayman Islands or the British Virgin Islands, allowing them to bypass the direct regulatory environment of the Chinese government. N-shares are denominated in U.S. dollars and are available to international investors.
FLXC provides a comprehensive exposure to over 900 companies across various sectors of the Chinese economy, from technology and consumer sectors to financials and industrials, offering a wide panorama of China's market landscape.
Managed by Franklin Templeton, the ETF has an annual expense ratio of 0.19% making it the cheapest option we've highlighted for Belgian investors.
Which China ETF to go for?
The most diversified ETF is the Franklin FTSE China ETF, through which you invest in 915 companies across China. It's also the cheapest ETF In our selection with a 0.19% annual cost. The largest ETF in terms of fund size is iShares MSCI China A.
Downsides of investing in China ETFs
Poor historical returns
Despite a spectacular growth of the Chinese economy these past few decades, the historical returns for the stock market have been very disappointing. The chart below shows the comparison between the historical performance of a China ETF and a world ETF, which invests in the global stock market. Whereas the world ETF has delivered an average annual return of 7.9% since 1994, a China ETF was stuck at a mere 0.5% per year. In real numbers, when taking into account inflation, this is a negative return.
How is this possible? One key reason is that the stock market and China's economy are disconnected. This is unlike many developed and emerging economies. They have a positive link between stock market returns and future GDP growth rates. But, China's domestic stock market has a less than 2% correlation. This is statistically insignificant. This disconnect has defined the Chinese stock market and has led to its poor performance compared to major stock markets worldwide.
Concentrated in one country
Investing in China is riskier than in Europe or the United States. China is a developing country. This volatility can increase due to political instability and economic uncertainty. It can also come from changes in government policies and fluctuating currencies. Such factors can lead to more significant and rapid price swings in ETFs focused on China.
One of the ETFs we've listed above showcases the risks of investing in one country. Many Belgians poured their savings into the MSCI China ETF (IE00BJ5JPG56). As the drawdown chart below shows, it has largely seen a positive return if you had started investing in 1992. It even reached a trough of almost -90% in the early 2000s. This volatility can be difficult to deal with as an investor. This also demonstrates the risks of investing in one specific country.
Transparency issues
Unfortunately, some companies in China do not adhere to the same standards of corporate governance and transparency as those in developed markets like the United States. This can make it harder for you to assess the true value and risk of your investments. Even though you're investing in hundreds of companies, you don't get a full run down for each company.
Geopolitical risks
The Chinese government exercises significant control over the country's economy and financial markets. Tensions between China and other countries, particularly the United States, can introduce risks. Trade wars, tariffs, and sanctions can hurt the Chinese economy and companies. They can impact the performance of China ETFs.
Curvo, an easier way to invest globally
At Curvo, our investment philosophy is rooted in the power of diversification. Unlike the narrow focus of putting all your money into real estate ETFs, the portfolios are designed to harness the growth potential of a global outlook.
Global outlook
We go beyond the confines of a single market or region, spreading investments across many countries around the globe. This global diversification helps mitigate risks associated with investing heavily in just one specific sector like real estate that might be volatile or underperform. Investing through Curvo means you in a broad and balanced portfolio, including exposure to over 7,500 companies across various sizes.
Diversified across many countries
While we recognise the potential of investing in China, the portfolios are carefully constructed to include a wide range of countries. Each portfolio invests in the stocks from over 40 countries, including developed markets (United States, Germany, Japan...) as well emerging markets like China or Brazil.
Invest in a portfolio tailored to you
Based on a questionnaire, the right mix of funds is selected that correspond to your goals and appetite for risk. The portfolios are managed by NNEK, a Dutch investment firm supervised by the Dutch regulator (AFM).
Get a better return on your time
Don't waste energy figuring out the intricacies of good investing. Start your investment plan and spend your free time on the things that matter most to you.
Invest sustainably
Investing sustainably is challenging because everyone has different beliefs and values. We focus on one guiding principle: none of the portfolios invests in companies destructive to the planet.
Discover Curvo and how a diversified, passive investment approach can help you build a resilient portfolio designed for the long haul.
Summary
China ETFs are tempting for Belgian investors. They allow you to tap into the growth of one of the world's largest economies. But, you should be cautious.
China ETFs offer diversification. They give exposure to many sectors and companies in the Chinese market. Yet it is very important to expand your investments beyond one country's market. A good investment strategy should have many types of assets. They should span different sectors and regions. This variety reduces the risks of market concentration. Also, using a passive, index-based investment philosophy can simplify investing. It may also improve long-term financial results.
This is why the portfolio offered through Curvo choose to include Chinese stocks, yet do not make it the core and diversify across many more markets.