Index funds have been available to mutual fund investors for years, but exchange-traded funds (ETF) are giving them a run for their money by offering lower expenses and broader exposure. While Matthews China (MCHFX) remains one of our favorite actively managed funds, here’s our favorite Asia index ETF.

As evidenced by the amount of ink spilled by both the general media and in this newsletter, Asia is a hot investment theme and exposure to the region will to be a major driver of overall returns. For many investors, especially those who take a passive approach to portfolio allocation, a simple index fund is all they need to catch the dragon by the tail. And an exchange-traded fund fits that bill.

iShares MSCI All Country Asia ex Japan (NSDQ: AAXJ) offers exposure to all of the key trends across the region–from the infrastructure build-out to the rise of the Asian consumer–and includes a healthy allocation to India.

With a third of the portfolio devoted to the financial sector, the fund mirrors the local markets. KB Financial Group (NYSE: KB), the fund’s top holding in this sector, accounts for 3 percent of its investable assets and holds almost half of South Korea’s total bank deposits. With a loan portfolio made up of about half consumer loans and the rest allocated to small and midsized businesses, the bank is well diversified and one of the most profitable financials in the region.

From there, sector exposure is spread across the major banks of China and India and includes a smattering of consumer-oriented financials, such as China Life Insurance (HK: 2628).

Given that many of the world’s leading electronics manufacturers are located in the region, information technology is the next largest sector allocation at 21.8 percent. Fund holding Taiwan Semiconductor (HK: TSM) probably manufactured the wafers used to produce the memory chips in your home PC, and you might have a television produced by Samsung Electronics (LON: SMSN) in your home.

This investment thesis sounds well and good. But as with any other prospective investment, there are other criteria to consider when deciding whether an ETF is appropriate for your portfolio.

Advocates for ETFs note that these offerings often feature lower expense ratios than traditional open-ended mutual funds. But contrary to popular belief, that’s not a hard and fast rule. Just like traditional mutual fund managers, ETF managers are paid based on a percentage of assets under management; frequently, the smaller the asset base the higher the fees. Always make sure that you’re taking advantage of the cheapest option available, and generally speaking, you never want to pay an expense ratio over 1 percent. With an expense ratio of just 0.72 percent, this iShares fund is one of the least expensive in its category.

Second, make sure that the fund lives up to its name. Many ETFs track custom-built indexes developed through a collaborative effort between management and an index provider. As a result, the indexes sometimes include unexpected securities; for example, a utility-focused ETF might also include companies that manufacture pipes, valves and concrete–names that you might not necessarily want to hold. Remember to always check a fund’s holdings before investing.

Finally, another major draw is that you can buy and sell shares throughout the trading day. But again, that’s not always the case.

ETF issues have proliferated over the past few years, and at least several new funds come to market each month. It can take time to create market awareness and build up enough volume in a security for it to be reliably tradable. With a lack of liquidity, your overall costs could be higher than you anticipate due to bid-ask spreads, or in the worst case scenario, you might not be able to sell your shares when you want. As a general rule of thumb, avoid ETFs whose spreads exceed 0.5 percent and whose average trading volume is less than 100,000 shares a day.

Although iShares MSCI All Country Asia ex Japan launched in late 2008, the ETF has caught on with institutional traders, which provides ample liquidity for retail investors. This popularity allows the fund to easily clear our tradability tests; its average daily volume clocks in at around 350,000 shares, and the spread amounts to hundredths of a percent. In the case of ETFs, institutional traders such as hedge funds are friends, not foes.

Want broad exposure to Asian equities without sinking money into the stagnant Japanese economy? iShares MSCI All Country Asia ex Japan is the best option available.