It's easy to invest in China ETFs when the economy is growing quickly. But with China's economy slowing down, the entire equation changes.
The 10 largest China ETFs, including the very biggest, iShares MSCI China ETF, are down an average of 2.2% this year, says an Investor's Business Daily analysis of data from Vetta Fi and S&P Global Market Intelligence. That's not the type of return investors look for from emerging markets positions. The S&P 500 is up roughly 15% this year in contrast.
And much of the noticeable trouble with investing in China started in mid-May amid worries of issues of disappointing economic growth. The $5.4 billion in assets iShares MSCI China ETF is down 10% from May 15. The S&P 500 is up roughly 3% in that time. Rising risk of tariffs and a trade war don't help either.
"China's certainly been climbing a wall of worry for years," said Kirsten Chang, analyst at Vetta Fi. "Dismal stock performance, a devastating property debt crisis and a painfully slow exit from Covid-19 restrictions are all to blame — on top of growing U.S.-China trade tensions and another contentious presidential election coming up in November."
Where's The Growth For China ETFs And Stocks?
Fading GDP growth is the No. 1 culprit for the sudden disappointing returns from China ETFs.
Data released in July showed the Chinese economy only grew 4.7% in the second quarter. That's a big letdown as many hoped the economy found its footing. That GDP statistic showed slower growth than the first quarter. And it also misses the Chinese government's 5% annual growth target. Meanwhile, a housing slump and deflation due to nervous consumers is snuffing out China ETFs.
"The recovery has been rocky — with the economy still on very uneven footing and many consumers still working to rebuild their savings," Chang said. "While exports have ramped up (growing at fastest pace in 15 months in June), many are worried about how long that will last given global trade policies are growing more protectionist. Imports have also slowed — fueling fears over weaker domestic demand."
Lagging China Shares
Even a dose of technology stocks isn't helping China ETFs much.
The iShares MSCI China ETF plunks nearly 8% of its portfolio in online retailer Alibaba Group. But that's hardly a help. Shares of Alibaba are down nearly 2% this year and off 6% since May 15. Alibaba is considered a consumer discretionary stock.
Nearly 29% of iShares China is in stocks in the consumer discretionary sector, also including its third largest position in PDD Holdings. The No. 2 biggest sector weight is in communication stocks. That includes the ETF's largest holding, Tencent.
Fed up investors are adjusting their portfolios. They've been yanking their money out of China-focused ETFs all year, says Vetta Fi's Chang. Meanwhile, they're redirecting money to ETFs that invest in emerging markets other than China like iShares MSCI Emerging Markets ex China and Columbia EM Core ex-China.
These two ETFs "have enjoyed strong net inflows and have been some of the most popular ways to get emerging markets exposure in 2024," Chang said.
So for now, investors are putting a pause on China ETFs, waiting to see what happens with many of the unknowns. "A lot of investors are still steering clear of China at least until we get more clarity on the U.S. election and potential tariffs — particularly on the technology side of things," Chang said.
Largest China ETFs
They're struggling this year, especially since May
| ETF | Symbol | Assets ($ billions) | YTD % Ch. | % Ch. Since May |
|---|---|---|---|---|
| iShares MSCI China | $5.4 | 2.2% | -10.0% | |
| KraneShares CSI China Internet ETF | $5.0 | -1.1% | -14.8% | |
| iShares China Large-Cap ETF | $4.5 | 7.4% | -8.9% | |
| Xtrackers Harvest CSI 300 China A-Shares ETF | $1.4 | -1.3% | -5.8% | |
| Direxion Daily FTSE China Bull 3X Shares | $0.9 | 3.2% | -27.6% | |
| Invesco China Technology ETF | $0.6 | -8.8% | -10.1% | |
| SPDR S&P China ETF | $0.5 | -1.2% | -10.5% | |
| WisdomTree China ex-State-Owned Enterprises Fund | $0.4 | -6.4% | -11.7% | |
| Direxion Daily CSI China Internet Index Bull 2X Shares | $0.3 | -12.3% | -29.6% | |
| iShares MSCI China A ETF | $0.3 | -2.6% | -7.0% |
