Krane Funds Advisors launches smart beta US dividend ETFs

Jun 14th, 2019 | By | Category: Equities

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Krane Funds Advisors, best known for its KraneShares-branded suite of China-focused ETFs, has broadened its capabilities beyond the Asian giant with the launch of two smart beta ETFs providing exposure to domestic US stocks with sustainable dividends.

KraneShares turns to smart beta for new US dividend ETFs

The funds provide exposure to US-listed firms that have increased their dividends for at least ten consecutive years.

The funds, which have been listed on NYSE Arca, are the KFA Large Cap Quality Dividend Index ETF (KLCD US) and the KFA Small Cap Quality Dividend Index ETF (KSCD US). They come with expense ratios of 0.41% and 0.51%, respectively.

The large-cap fund is linked to the Russell 1000 Dividend Select Equal Weight Index which consists of Russell 1000 constituents that have increased their dividends annually for at least ten consecutive years.

The small-cap fund tracks the Russell 2000 Dividend Select Equal Weight Index, which follows a similar investment approach but targets stocks in the small-cap Russell 2000 Index.

According to KraneShares, the funds’ underlying index methodologies help investors to avoid ‘dividend traps’, where a stock’s dividend yield looks attractive but the firm’s fundamentals are not able to support the payouts in the long-term, leading to a reduction or scrapping of the dividend.

Eligible securities are ranked according to a risk-adjusted momentum score that includes both six- and twelve-month changes in the stock price.

The number of eligible securities determines the number of stocks making it through to the final index: if there are less than 40 eligible securities, all stocks are included in the index; if there are between 40 and 80 eligible securities, 40 of the highest-ranked stocks are included in the index; and if there are more than 80 securities, 50% of the highest-ranked stocks are included in the index.

Constituents in the final index are equally weighted. Index reconstitution and rebalancing occur quarterly.

The large-cap fund currently contains 96 constituents and is offering a dividend yield of 2.3%, while the small-cap fund currently consists of 43 constituents. Its dividend yield is also 2.3%.

A number of ETFs already exist that provide exposure to firms with a history of growing their dividends, most notably those linked to indices from S&P Dow Jones Indicies’ Dividend Aristocrats suite.

The original and largest of these funds is the $56 billion SPDR S&P Dividend ETF (SDY US) which tracks the S&P High Yield Dividend Aristocrats Index. The index is comprised of the 50 highest dividend yielding constituents of the S&P Composite 1500 Index that have increased dividends every year for at least 25 consecutive years. The fund’s expense ratio is 0.35%.

Other comparable funds include the $4.5bn ProShares S&P 500 Dividend Aristocrats ETF (NOBL US) which provides exposure to US large-caps that have increased their dividends for at least 25 consecutive years, and the $500m ProShares S&P MidCap 400 Dividend Aristocrats ETF (REGL US) which targets mid-cap stocks with a 15-year history of increasing dividends. These funds come with expense ratios of 0.35% and 0.40% respectively.

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