Find out which are the best-in-class ETFs to invest in this year through our ETF Focus List 2021

• In this year’s edition of our ETF Focus List, there are a total of nine changes.

• Given the delisting of the Vanguard Total China ETF (HKEX:3169), the iShares Core MSCI China ETF (HKEX:2801) is now our recommended China ETF in the “Core Equity” category.

• With their decent yields and low correlations with global bonds, Chinese government bonds are a good fixed income diversifier. Hence, we have added China Government-Centric bonds into the “Fixed Income” category.

• New additions to “Tactical Plays” category include China Real Estate, China Semiconductors, Digital Payments, and US Banks.

The ETFs on our Focus List are selected based on a set of quantitative and qualitative factors. The quantitative factors include expense ratio, liquidity, and tracking difference. Meanwhile, the qualitative factors that we consider are the underlying index and structure of the ETF.

Our ETF Focus List is updated on an annual basis to ensure that our recommendations remain current and relevant for investors. This year is no exception – as we approach the halfway mark of 2021, we have done a refresh of our ETF Focus List. For 2021, we have made several changes to the list in order to feature a wider range of ETFs the world has to offer.

iShares Core MSCI China ETF (HKEX:2801) – our new recommended China ETF

As a house, we believe that China is well on track to overtake the US as the world’s largest economy in 2026. China is set on the course of growth for the foreseeable future, and there are plenty of opportunities lying ahead for investors.

Given the delisting of our previous recommended China ETF – Vanguard Total China ETF (HKEX:3169) – the iShares Core MSCI China ETF (HKEX:2801) is now our recommended ETF for investors who wish to gain exposure to China’s equity market.

The iShares Core MSCI China ETF (HKEX:2801) tracks the performance of the MSCI China Index. Like the Vanguard Total China ETF, it provides good exposure to Chinese companies as the MSCI China Index features large and mid-cap companies listed in mainland China as well as outside mainland China.

While the iShares Core MSCI China ETF (HKEX:2801) consists of multiple share classes, a key difference to take note is that it has a relatively lower weightage to A-shares and higher weightage to H-shares and ADRs as compared to the Vanguard Total China ETF (HKEX:3169) as shown in Table 1 below.

Table 1: Country of listing

	iShare Core MSCI China ETF (HKEX:2801)	Vanguard Total China ETF (HKEX:3169)
Hong Kong	56.7%	41.2%
Mainland China	11.8%	48.2%
US	31.3%	10.6%
Source: MSCI, Vanguard, iFAST Compilations Data as of April 2021

Nonetheless, we believe that the MSCI China Index is a good representation of the Chinese economy. After taking into account quantitative factors such as liquidity and expense ratio, we believe that the iShares Core MSCI China ETF (HKEX:2801) is the next best China ETF available on the market.

In the previous edition of our ETF Focus List, we had three different ETFs to gain exposure to China – one each for China A-Share, China H-Share, and Total China. As our new recommended ETF, iShares Core MSCI China ETF (HKEX:2801), already has decent exposure to the H-shares market, we have made the decision to merge the “Total China” and “China H-Share” sub-categories into the new “China” sub-category.

Now, the options have been narrowed down to just two. For pure-play exposure to onshore Chinese companies, investors can go with the iShares FTSE China A50 ETF (HKEX:2823). For diversified exposure to Chinese companies regardless of the country of listing, our recommended ETF is now the iShares Core MSCI China ETF (HKEX:2801).

Added China Government-Centric bonds into “Fixed Income” category

Despite having a sovereign credit rating of A+ by Standard & Poor’s, China’s government bonds offer much higher yields compared to similar-tenured government bonds issued by developed economies. Apart from its higher absolute level of yields, the Chinese government bond market is also less volatile.

Traditionally, Chinese government bonds have exhibited low correlation with other fixed income markets. This is mainly driven by domestic factors, with China’s interest rate movements and monetary policy largely independent from other major economies. Thus, Chinese government bonds can provide diversification benefits to any global fixed income portfolio.

With their decent yield and low correlations with global bonds, we believe that an allocation to onshore Chinese government bonds has become increasingly compelling. To reflect the growing importance of China’s onshore government bond market, we have added the ICBC CSOP FTSE Chinese Government Bond Index ETF (SGX:CYB) to our ETF Focus List.

(Related article: Chinese government bonds are a good fixed income diversifier)

Other key changes to the list

Beside the changes already mentioned above, we have made exciting additions into the “Tactical Plays” category and replaced our recommended ETF for India.

Table 2 below summarises all of the changes made this year.

Table 2: Changes to the 2021 ETF Focus List

	2020	2021
Core Equity
China H Share	Hang Seng China Enterprises Index ETF (HKEX:2828)	---
Total China	Vanguard Total China Index ETF (HKEX:3169)	---
China	---	iShares Core MSCI China ETF (HKEX:2801)
Fixed Income
China Government Centric	---	ICBC CSOP FTSE Chinese Government Bond Index ETF USD (SGX:CYB)
Single Market
India	iShares MSCI India Index ETF (SGX:I98)	iShares MSCI India ETF (BATS:INDA)
Tactical Plays
China Real Estate	---	Global X MSCI China Real Estate ETF (NYSE:CHIR)
China Semiconductors	---	Global X China Semiconductor ETF (HKEX:3191)
Digital Payments	---	ETFMG Prime Mobile Payments ETF (NYSE:IPAY)
US Banks	---	Invesco KBW Bank ETF (NASDAQ:KBWB)

India: The iShares MSCI India ETF (BATS:INDA) has replaced our previous recommended ETF – iShares MSCI India Index ETF (SGX:I98). Not only does it have higher liquidity, it also has a lower expense ratio of 0.69% compared to the 1.00% charged by iShares MSCI India Index ETF (SGX:I98).

China Real Estate: This is a new addition to the “Tactical Plays” category. China’s growing urbanisation rate is expected to support the demand for housing. Investors who are keen to invest in this sector can do so using the Global X MSCI China Real Estate ETF (NYSE:CHIR), which offers exposure to large and mid-cap Chinese real estate companies.

China Semiconductors: The recent US technology export ban on Chinese semiconductor companies will push China to double down its efforts in building up its semiconductor industry, allowing the industry to enter a phase of supercharged growth. Investors who are keen to invest in this sector can do so using the Global X China Semiconductor ETF (HKEX:3191), a new addition to the “Tactical Plays” category, offering exposure to semiconductor firms listed in mainland China.

Digital Payments: As countries across the globe shift towards a cashless society, it provides great momentum for the further adoption of digital payment systems. Investors who are keen to invest in this sector can do so using the ETFMG Prime Mobile Payments ETF (NYSE:IPAY) – another new addition to the “Tactical Plays” category – which seeks to track the performance of the mobile and digital payments industry.

US Banks: This is a new addition to the “Tactical Plays” category. With rising inflation as the backdrop, rate hikes may get pulled forward, providing a major catalyst for US banks as their profitability depends largely on net interest income. Investors who are keen to invest in this sector can do so using the Invesco KBW Bank ETF (NASDAQ:KBWB), which focuses on the leading US commercial banks.

A starting point for your investment journey

ETFs are a great investment tool that allows investors to gain diversified exposure to markets at a low cost. While choosing the right ETF is not rocket science, it can make a difference between investment success and mediocrity.

The objective of our ETF Focus List is to serve as a good starting point for investors by zeroing in on the best-in-class ETFs from the vast number of options available on our platform. A few ETFs that were in last year’s Focus List have been excluded this time round as they were beaten by a hair’s breadth by a fellow peer. Investors who are holding on to them should not be worried as they remain viable investment options. They will also continue to be available under the Regular Savings Plan (RSP).

Declaration:

For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold a NIL position in the abovementioned securities.