KraneShares, the New York-based exchange-traded fund issuing-arm of China-focused boutique asset management company Krane Fund Advisors, recently unveiled one of the more innovative products launched in the last couple of years, and is likely to find favor with yield hungry investors in the fixed-income space.
The newly launched KraneShares E Fund China Commercial Paper ETF (KCNY) seeks exposure in a specific niche in China’s $4.5 trillion “onshore” bond market: Commercial Papers (CP).
Although the new fund is the third China onshore bond ETF to debut in the US in the span of a month, KCNY is unique in that it is the first commercial-paper ETF to trade in the US. Commercial papers are short-term debt instruments with a maturity of less than a year.
To be sure, China’s onshore Yuan-denominated bond market, which is 40 times larger than Hong Kong’s “offshore” market, is difficult to access for foreign investors. To circumvent this problem, KraneShares has tied up with E-Fund Management, the largest fixed-income manager in mainland China and the second largest RQFII manager globally with over $50 billion in assets under management.
At $1.5 trillion dollars, China’s corporate debt market is the world’s largest. The commercial paper segment exceeds $270 billion in total outstanding with average volume crossing $3 billion daily. Chinese firms are projected to contribute a third of global corporate-debt issues over the next five years, indicating adequate volume and liquidity for future renminbi-denominated products.
The passively-managed new fund tracks the CSI Diversified High Grade Commercial Paper Unhedged Index. KCNY’s portfolio contains investment-grade sovereign, quasi-sovereign and corporate-issued commercial papers with a maturity not exceeding one year and no less than one month. The average maturity of the fund’s holdings is only 128 days.
The fund’s underlying index had a weighted-average trailing 12-month yield of more than 4 percent compared to less than 0.5 percent for the S&P US Commercial Paper Index. The spread between long- and short-dated Chinese debt-instruments are fairly narrow, which results in robust yields at the short-end of the curve.
KCNY has an annual expense ratio of 0.56 percent.
Disclosure: No holdings
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