Krane Funds Advisors launches tactical US high-yield/Treasury rotation ETF

Dec 9th, 2019 | By | Category: Fixed Income

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Krane Funds Advisors has launched a fixed income ETF providing risk-managed exposure to high-yield credit and US Treasuries.

Krane Funds Advisors launches risk-managed high yield ETF

The fund tactically rotates between US Treasuries and high-yield credit based on recent performance.

The KFA Dynamic Fixed Income ETF (KDFI US) has listed on NYSE Arca and comes with an expense ratio of 0.45%.

The fund is linked to the FTSE US High-Yield/Treasury Rotation Index which tactically rotates between high-yield credit and US Treasury sub-indices based on recent performance.

The underlying sub-indices are the FTSE US Treasury 1-5 Years Index, the FTSE US Treasury 7-10 Years Index, and the FTSE US High-Yield Market BB/B-Rated Capped Custom Index.

The Treasury bond indices consist of fixed-rate US Treasury bonds with issue sizes greater than $500 million and remaining maturities between one to five years or seven to ten years. Constituents are weighted by market value outstanding.

The high-yield index covers US dollar-denominated corporate bonds with credit ratings between ‘BB+’ and ‘B-’ that have been issued by companies domiciled in the US or Canada. Eligible bonds must have an issue size greater than $5 billion and a remaining maturity of at least one year. Constituents are weighted by market value outstanding subject to a 2% cap per issuer.

As of each quarterly review, the cumulative quarterly return of these three indices is compared, and the index with the highest return across that period receives the full allocation for the coming quarter.

The ETF may appeal to investors who wish to pursue a dynamic fixed income strategy based on credit spreads. The approach has the potential to enhance return and reduce drawdowns compared to a buy-and-hold investment in high-yield securities.

The main risk, however, is that the fund may invest in a sector with strong previous-quarter returns where momentum is just beginning to reverse, leading to poor subsequent performance. Similarly, the fund may avoid a sector with poor previous-quarter returns where recovery is just starting to take hold, leading to the fund missing out on subsequent gains.

Additionally, due to the dynamic nature of the strategy, the ETF may incur high turnover rates which may increase brokerage commission costs and negatively impact performance.

The fund comes with an expense ratio of 0.46%. Distributions are sent to investors on an annual basis.

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