KraneShares launches defined outcome ETFs on Chinese internet stocks

Feb 9th, 2024 | By | Category: Equities

Krane Funds Advisors (KraneShares) has made its foray into defined outcome investing with the launch of two ‘Buffer’ ETFs focused on Chinese internet stocks.

Jonathan Krane, CEO and Founder of KraneShares

Jonathan Krane, CEO and Founder of KraneShares.

Listed on NYSE Arca, the new funds are the KraneShares 100% KWEB Defined Outcome January 2026 ETF (KPRO US) and the KraneShares 90% KWEB Defined Outcome January 2026 ETF (KBUF US).

Defined outcome, or target outcome, investing refers to an investment strategy that shapes the potential outcomes of a reference asset or index to fit specific protection and return levels over a predetermined period, allowing for a more controlled investment experience.

In terms of the new funds, KPRO and KBUF are referenced to the KraneShares CSI China Internet ETF (KWEB US). KWEB tracks the CSI Overseas China Internet Index which consists of US and Hong Kong-listed stocks of China-domiciled companies involved in the internet sector. Eligible firms include those that develop and market internet software, provide internet services, manufacture home entertainment and educational software, provide retail or commercial services primarily through the internet, or develop and market mobile internet software and services.

KPRO and KBUF aim to track the performance of KWEB while offering protection against 100% and 90% of losses, respectively, as referenced from the start of a two-year outcome period ending on 16 January 2026.

The funds’ defined outcome profiles are obtained through investing in customizable long-term exchange-traded option contracts on KWEB.

James Maund, Head of Capital Markets at KraneShares, commented: “The defined outcome strategies are made possible by KWEB’s deep, liquid options market. With approximately $5.5 billion in notional open interest, KWEB now has the tenth-largest options market amongst all 3,405 US-listed ETFs. This level of options liquidity makes it efficient for us to create products like KPRO and KBUF for our clients.”

The downside protection inherent in KPRO and KBUF comes at the expense of caps on their potential upside over the two-year outcome period. The caps for the funds are set at the beginning of the outcome period and are dependent upon market conditions at that time.

According to KraneShares, the initial caps of KPRO and KBUF are 22.69% and 41.20% (before fees and expenses), respectively.

Investors should note that, as the ETFs’ defined outcome profiles have been tailored for their specific outcome period, this may affect the funds’ interim returns during the outcome period in two ways.

Firstly, due to the time value of the underlying options, the ETFs are likely to exhibit lower betas than traditional index-tracking ETFs. As such, they may lag the performance of their reference asset when markets are trending upwards.

Secondly, the ETFs are designed to provide specific levels of protection as referenced from the start of their outcome period. An investor who purchases shares of the ETFs after the outcome period has begun may be immediately exposed to the reference asset’s downside in so far as the asset has appreciated since the start of the outcome period.

While these dynamics can present a challenge, KraneShares provides full daily disclosure for its defined outcome ETFs including remaining cap and buffer levels, remaining downside before buffer, and remaining days in the outcome period.

KPRO and KBUF each come with an expense ratio of 0.95%.

Jonathan Shelon, COO at KraneShares, said: “We are seeing a record valuation disparity between the US and China and think now is the time to invest. However, as 2024 progresses, volatility persists. These ETFs are excellent options for investors looking for China exposure and seeking downside protection.”

Jonathan Krane, CEO of KraneShares, added: “China’s E-Commerce market size in 2022 was $2 trillion, twice that of the US. We are dedicated to providing investors a variety of ways to access this incredible growth story. Our flagship ETF, KWEB, has become the benchmark for China’s internet sector globally. We believe KPRO and KBUF will prove just as attractive to investors seeking to access the China internet growth opportunity but with downside protection.”

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