Navigating Volatility in China ETFs: A Strategic Look at MCHI, FXI, and KWEB Amid Recent Declines

The Chinese equity market has long been a source of both opportunity and turbulence for global investors. As of September 2025, three major exchange-traded funds (ETFs)—the iShares MSCI China ETF (MCHI), the iShares China Large-Cap ETF (FXI), and the KraneShares CSI China Internet ETF (KWEB)—offer distinct pathways to access this dynamic market. However, recent volatility and divergent performance metrics underscore the importance of dissecting sector concentration, market exposure, and risk-adjusted returns to identify near-term opportunities.

Performance and Risk-Adjusted Returns: A Tale of Three ETFs

According to a report by Portfolios Lab, MCHI has outperformed both FXI and KWEB in year-to-date (YTD) returns, achieving 32.17% compared to FXI’s 27.83% and KWEB’s 25.24% [1]. Over the past year, MCHI’s 52.72% return also edges out FXI’s 49.65% and KWEB’s 45.68% [1]. These figures highlight MCHI’s ability to capitalize on broader market trends, but they must be contextualized with risk metrics.

Risk-adjusted performance reveals nuanced differences. MCHI’s Sharpe Ratio of 1.55 and Sortino Ratio of 2.13 suggest superior returns per unit of risk compared to FXI’s 1.45 and 2.03 [1]. However, FXI’s Calmar Ratio of 0.73—measuring returns relative to maximum drawdown—outperforms MCHI’s 0.94, indicating better resilience during downturns [1]. KWEB, meanwhile, lags across the board, with a Sharpe Ratio of 1.10 and Calmar Ratio of 0.57 [3], reflecting its higher volatility and weaker risk management.

Sector Concentration: Diversification vs. Specialization

The sector allocations of these ETFs shape their exposure to market shifts. KWEB’s focus on internet and technology firms—such as Alibaba, Tencent, and PDD Holdings—makes it highly sensitive to regulatory changes and tech-sector headwinds [6]. As of August 2025, 43.49% of KWEB’s assets are concentrated in Technology Services, with another 29.03% in Retail Trade [1]. This specialization amplifies its volatility, as evidenced by its 41.41% daily standard deviation [2].

In contrast, MCHI offers a more diversified approach. Tracking the MSCI China Index, it allocates 23.22% to Technology Services, 19.06% to Finance, and 15.19% to Retail Trade [1]. This broad exposure mitigates sector-specific risks while capturing growth across China’s economic pillars. FXI, which tracks the FTSE China 50 Index, is weighted toward large-cap stocks like Alibaba, Tencent, and China Construction Bank [4]. While its top 10 holdings account for 56.09% of assets [4], its sector mix—spanning financials, consumer services, and communication services—provides a middle ground between KWEB’s narrow focus and MCHI’s breadth.

Market Exposure and Strategic Implications

The geographic and market-cap focus of these ETFs further differentiates their risk profiles. FXI’s 98.16% allocation to foreign stocks, primarily in China, and its exclusion of mid- and small-cap equities [5], make it a concentrated bet on large-cap resilience. MCHI, by contrast, includes a wider range of companies and geographic exposure, offering a buffer against localized shocks. KWEB’s heavy reliance on internet firms, however, leaves it vulnerable to regulatory crackdowns or tech-sector downturns.

For investors seeking near-term opportunities, the choice between these ETFs hinges on risk tolerance. MCHI’s balanced approach and strong risk-adjusted returns make it an attractive option for those prioritizing growth with moderate volatility. FXI’s superior Calmar Ratio and large-cap focus could appeal to investors wary of drawdowns, while KWEB’s high Sharpe Ratio (1.35) [2] might tempt those seeking aggressive growth in the tech sector, albeit with elevated risk.

Conclusion: Balancing Growth and Risk in a Volatile Landscape

The Chinese equity market remains a complex puzzle, with regulatory shifts, macroeconomic trends, and sector-specific dynamics shaping outcomes. MCHI’s diversified exposure and robust risk-adjusted metrics position it as a versatile choice for navigating near-term volatility. FXI’s large-cap focus and drawdown resilience offer a safer harbor, while KWEB’s tech-centric strategy demands a higher risk appetite. As investors weigh these options, a strategic allocation that balances sector diversification and risk management will be key to capitalizing on China’s long-term potential.

Source:
[1] FXI vs. MCHI — ETF Comparison Tool, [https://portfolioslab.com/tools/stock-comparison/FXI/MCHI]
[2] KWEB vs. MCHI — ETF Comparison Tool, [https://portfolioslab.com/tools/stock-comparison/KWEB/MCHI]
[3] FXI vs. KWEB — ETF Comparison Tool, [https://portfolioslab.com/tools/stock-comparison/FXI/KWEB]
[4] KraneShares CSI China Internet ETF | KWEB, [https://kraneshares.com/kweb/]
[5] FXI Portfolio, [https://www.schwab.wallst.com/Prospect/Research/etfs/portfolio.asp?symbol=fxi]
[6] iShares China Large-Cap ETF | FXI, [https://www.ishares.com/us/products/239536/ishares-china-largecap-etf]