Should Canadian Investors Buy China ETFs?

U.S. stock market valuations sit among the highest globally, trading at about 23.79 times forward earnings, according to FinViz. That means investors are currently paying roughly $23.79 for every dollar of projected earnings—well above long-term averages. By contrast, Chinese equities look far cheaper on a price-to-earnings basis, with a forward P/E of about 10.85 and a global ranking much lower than the United States. That valuation gap is attractive for investors hunting opportunity and diversification, but it’s important to examine the practical costs and risks before adding Chinese equity exposure through Canadian-listed ETFs.

As a Canadian investor, you likely have access to several exchange-traded funds (ETFs) on the Toronto Stock Exchange that offer exposure to Chinese equities. Before you decide to buy, consider the tax implications, fees, and trading frictions that can significantly reduce returns on these products. Below is a clear, practical look at the main issues, and how they affect the case for owning Canadian-listed Chinese equity ETFs.

The double whammy of foreign withholding tax

One of the most overlooked costs when owning Canadian-listed Chinese ETFs is foreign withholding tax applied at multiple stages. Some funds are structured in ways that mean a single dividend payment can be taxed more than once before reaching a Canadian investor.

Consider the iShares China Index ETF (XCH), which tracks the FTSE China 50 Index but does not hold the underlying stocks directly. Instead, XCH holds the U.S. dollar–denominated iShares China Large-Cap ETF (FXI). Because FXI includes Chinese-domiciled companies, dividends first face Chinese withholding tax at the source. Then, when those dividends flow from FXI into XCH, a second layer of withholding tax—typically 15% in the U.S. tax regime—can apply. The cumulative effect is a meaningful tax drag on dividend returns.

1. First layer: China taxes dividends before they reach FXI.
2. Second layer: A U.S. withholding can apply when FXI dividends are passed into XCH.

The only straightforward way to avoid that second withholding is to buy FXI directly in a U.S.-dollar account or hold it inside a tax-sheltered RRSP, which may recognize different withholding rules. That approach, however, often involves currency conversion costs and the operational steps of moving money across borders—nontrivial frictions for many Canadian investors.

High management expense ratios

Another significant drag on returns is the management expense ratio (MER). Many Canadian-listed China ETFs carry relatively high MERs compared with broad-market Canadian or U.S. ETFs. For example, XCH charges about 0.86% MER, while the BMO MSCI China ESG Leaders Index ETF (ZCH) charges around 0.67%. On a $10,000 investment, those fees translate to $86 and $67 per year respectively—meaningful sums that compound over time.

By comparison, many Canadian large-cap equity ETFs carry MERs as low as 0.05%, such as some broad Canadian equity index ETFs. That difference in fees can create a persistent long-term headwind, reducing your compounded returns year after year. When evaluating China exposure, weigh whether the incremental return potential justifies paying higher annual fees.

Expensive trading costs

Trading costs are another invisible expense. Even if an ETF’s MER is reasonable, wide bid-ask spreads can add to your effective cost of trading. One example is the CI ICBCCS S&P China 500 Index ETF (CHNA.B). It manages to avoid a second U.S. withholding layer by holding stocks directly and even provides access to China A-shares, which gives broader exposure. Its MER—around 0.59%—is lower than some peers.

But CHNA.B tends to trade with a wider bid-ask spread because many of its underlying Chinese stocks are less liquid than large-cap Canadian or U.S. names. On a recent date the spread was around 0.31%. Wider spreads increase the cost of entering and exiting positions and can significantly impact smaller or more frequent trades. ETF liquidity depends not only on the ETF’s trading volume but also on the liquidity of the underlying holdings; in markets where those holdings are thinly traded, investors often pay more to transact.

The final word on Chinese equity ETFs

Before allocating a portion of your portfolio to a dedicated Chinese equity ETF, ask whether you already have adequate exposure through broader funds. For example, asset allocation ETFs that target global equities or emerging-markets exposure often include a meaningful China weighting. If you hold a diversified all-equity ETF, that may already provide the recommended level of China exposure for many investors.

If you want more targeted exposure, consider buying a broad emerging-markets ETF that includes China, or VEE-style funds that offer diversified emerging-market access with typically lower MERs (around 0.25% in some examples). That approach gives exposure not only to China but to other fast-growing markets such as India, Taiwan and Brazil, which can help spread country-specific risk.

Chinese stocks can offer attractive valuations relative to developed markets, and increasing exposure can be a sensible strategic decision. At the same time, Canadian investors need to factor in the concrete costs: double withholding taxes tied to certain fund structures, higher MERs than typical Canadian or U.S. index ETFs, and wider bid-ask spreads on less liquid products. For many investors these expenses and operational complexities will reduce the appeal of Canadian-listed China ETFs, though for others the potential upside in China may still justify the trade-offs.

Read more about ETF investing:

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• Why and how to increase small-cap exposure with ETFs