New China ‘Paper’ ETF A Groundbreaker

December 04, 2014

Growing China-Focused Bond-ETF Market

Other issuers are also honing in on mainland China’s higher yields. In just the past month, there’s been a string of onshore China bond ETF launches.

Van Eck launched its Market Vectors ChinaAMC China Bond ETF (CBON) on Nov. 10. Global X joined the in with its Global X GF China Bond ETF (CHNB) only a week later. Investor appetite for these funds has been strong, with Global X’s CHNB and Market Vectors’ CBON pulling in $50 million and $20 million, respectively, in less than a month.

Yet I think throwing KCNY into the mix with CBON and CHNB is debatable. KCNY targets such a different sliver of that market that, in my view, it’s actually the first-to-market fund in its own class.

Here are a few highlights about KCNY worth pointing out.

KCNY Talking Points

  • KCNY has access to China’s interbank bond market, where more than 90 percent of all onshore bond trading takes place. If fact, commercial paper in China is only traded on the interbank market, so KCNY has to have access to it.
  • The paper held in KCNY is all rated investment grade, by one or more local credit agencies in China. See my colleague Howard Lee’s blog for his take on local rating agencies.
  • Commercial paper in the U.S. is predominantly bought at a discount to par, but not so in China. According to E Fund, most of the paper held in KCNY will have a coupon.
  • The fund launched with an impressive $21 million in seed capital, suggesting big institutional backing. To put things into perspective, most new ETFs launch nowadays with only about $2.5 million.
  • KCNY is fully exposed to the renminbi, a currency that’s appreciated more than 25 percent against the U.S. dollar since currency restrictions were relaxed in 2005.

Broad Takeaway

I’ve been talking about innovation in the China ETF space for years now. KCNY highlights just how innovative issuers can get in bringing alluring, formerly restricted asset classes to market.

If KraneShares can deliver on the fund’s mandate, KCNY could very well be a game changer for the firm, as well as for E Fund in its first partnership with a U.S. ETF issuer.


At the time this article was written, the author held long positions in CBON and CHNB, and had plans to go long in KCNY. Contact Dennis Hudachek at [email protected], or follow him on Twitter @Dennis_Hudachek.

 

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