KraneShares’ New ETF Bets Big on China Despite Sagging Economy

The fund is overweight the country’s stocks by more than 20 points.

KraneShares ETFs has launched a new actively managed emerging market ETF with a heavy allocation to China markets, a contrarian investment as the country’s economy struggles. 

The KraneShares Dynamic Emerging Markets Strategy ETF (KEM), which launched Friday, provides exposure to emerging markets by holding two other KraneShares ETFs: the KraneShares MSCI All China Index ETF (KALL) and the KraneShares MSCI Emerging Markets ex China Index ETF (KEMX). KALL is a China stock index fund and KEMX is an index fund that tracks emerging market stocks outside of China.  

Currently, KEM comprises 54% of KALL, 36% of KEMX and 10% cash, with its allocation to China 23 percentage points higher than the 31% baseline for the fund. KEM’s bullish position on the country is at odds with current trends, as China’s market has sagged this year. The country has struggled as its growth has slowed and other economies have sought to diversify their supply chains away from China.  

In a recent interview with CNBC, KraneShares’ Chief Investment Officer Brendan Ahern said China’s government was taking an incremental, rather than a “bazooka,” type approach to stimulus, which has disappointed investors.  

China’s Woes 

Barclays currently estimates China will not hit its 5% economic growth target for 2023, as its economy has not bounced back as much as expected after the end of its zero-COVID-19 policy. 

One reason for China’s woes is that the Federal Reserve’s rate hikes have been a major headwind for all non-U.S. equities, according to Ahern. The higher rates in the U.S. have drawn capital to the country.  

Shifting supply chains have also hit China’s growth, as the percentage of goods the U.S. imports from China dropped from 17% last year, down from 22% in 2017, according to analysis in the Wall Street Journal.  

Other emerging market countries, including Mexico and Vietnam, have benefited from firms trying to diversify their supply lines. Both countries’ exports to the U.S. have grown in recent years.  

The majority owner of Krane Funds Advisors, the parent firm of KraneShares, is China International Capital Corporation, which is a partly state-owned China investment bank. KraneShares has not responded to requests for comment. 

Contact Gabe Alpert at [email protected]