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.

Attend Inside ETFs, the World's Largest ETF Conference!


Find your next ETF

Reset All