New China ‘Paper’ ETF A Groundbreaker

December 04, 2014

If the stars align, KraneShares’ latest China ETF could be a blockbuster.

On Wednesday, China ETF specialist KraneShares brought to market one of the more innovative ETF launches I’ve seen in years.

The new KraneShares E Fund China Commercial Paper ETF (KCNY) tackles a specific niche within China’s massive $5 trillion “onshore” bond market: commercial paper.

KCNY breaks new ground because it’s not only the first China commercial paper ETF, it’s the first U.S.-listed commercial paper ETF, period. There is currently no other ETF focused exclusively on commercial paper.

The fund tracks an index of “investment grade,” ultra-short-term Chinese sovereign and corporate debt that yields north of 4 percent. KraneShares said in regulatory paperwork that the fund’s average maturity is only 128 days.

This is significant because KraneShares is clearly aiming for a sliver of the trillions of dollars parked in U.S. money market funds earning little to no interest at the moment.

Having been a renminbi bull for years myself, I’m excited to see a renminbi-denominated fixed-income ETF aimed for capital preservation with such an attractive yield.

A Very Alluring Pitch

According to E Fund Management, KCNY’s sub-advisor, China’s commercial paper market now tops $270 billion and trades an average $3 billion a day. Roughly 90 percent of the outstanding paper is issued by local and central state-owned enterprises, and two-thirds carries an AAA rating by at least one local rating agency.

By the way, E Fund Management (HK) holds the renminbi qualified foreign institutional investor license needed by KCNY to directly hold mainland Chinese securities. It’s a subsidiary of E Fund, one of the largest asset managers in China.

And to put a finer point on what I said above, KCNY’s index sports an eye-popping weighted-average portfolio yield of 4.55 percent, according to David Zhang, chief investment officer and deputy chief executive officer of E Fund. Astonished investors need to understand that China’s yield curve is very flat, offering plumpy yields at the shorter end of the curve.

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