Best China ETFs for May 2021

Disclosure: The author held no positions in the aforementioned securities at the time of publication.

Investors looking to diversify their portfolios geographically have a range of options, and getting into China — the world's second-largest economy — can be particularly appealing. If so, one route is to buy China exchange-traded funds.

What are China ETFs?

China ETFs are exchange-traded funds that track publicly listed Chinese companies and give investors exposure to Chinese markets without having to directly purchase those stocks. Instead, the issuing company purchases the underlying asset (such as stocks, bonds or currency), and fund investors purchase shares in the fund. As the underlying assets rise and fall, so does the value of your fund investment.

Researchers say investors often suffer from “home bias” — the tendency to purchase domestic stocks for their portfolio. But U.S. stocks make up only about 56% of global equities. Exposure to international markets, especially a large player like China, gives investors the benefit of diversification as one region’s markets may rise while others fall.

Investing in China ETFs carries risks, such as trade tensions with the U.S. and the aftermath of the coronavirus outbreak. Still, many investors are placing long-term bets on the world’s second-largest economy.

» MORE: How does an ETF work?

Best-performing China ETFs

Below is our list of best-performing China equity ETFs. We've excluded China exchange-traded notes, leveraged China ETFs and class A shares.

YTD returns are based on current price. Data is pulled from Google Finance and may be delayed up to 20 minutes. Information is solely for informational purposes and not for trading purposes or advice.

How to invest in China ETFs

Here’s how to buy shares in a China ETF:

Step 1: Find a China ETF

Search for China ETFs on your broker's website. (No broker? Here's how to open a brokerage account.)

Step 2: Analyze the ETF

Some things to check before purchasing shares in a China ETF:

• 5-year returns. Although we list the top ETFs by year-to-date performance above, it pays to look at longer-term results rather than chase recent performance.

• Type of China ETF. There are over 50 China ETFs available to U.S. investors, including equity, fixed income and currency assets classes. Some focus on the total China market, while others focus on company size or a particular sector, such as technology, health care and real estate.

• Expense ratio. This annual fee is paid out of your investments in the fund, so the lower the expense ratio, the better. The average expense ratio for China ETFs is 0.7%, according to ETF.com.

Important note: The average investor should avoid leveraged China ETFs, which use financial derivatives and borrowed cash to make predictions on future prices. The average investor also shouldn't consider China exchange-traded notes, or ETNs, which are secured debt obligations. Unlike ETFs, these funds don’t actually own the underlying asset and have a higher risk of default. These investments aren’t good for a buy-and-hold strategy favored by many investors saving for the long term.

» MORE: Investing in ETFs vs. mutual funds

Step 3: Buy the China ETF

You can purchase ETFs just like you’d buy a company stock — for both, you need an online brokerage account to buy and sell shares.

To see brokerages with a broad ETF selection, check out our full list of the best brokers for ETF investing.

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