KraneShares has made changes to its $740 million flagship China A-share ETF – the KraneShares Bosera MSCI China A Share ETF (KBA US) – with the fund adopting a new underlying reference index.
Jonathan Krane, CEO of KraneShares.
The NYSE Arca-listed fund, which previously tracked the MSCI China A Index, is now called the KraneShares Bosera MSCI China A 50 Connect Index ETF, referenced to the MSCI China A 50 Connect Index.
The fund’s ticker (KBA) and expense ratio of 0.56% remain unchanged.
The outgoing index captures large and mid-cap representation across Chinese securities listed on the Shanghai and Shenzhen stock exchanges, covering all securities that are accessible through the Northbound Stock Connect channel. As of the end of 2021, the index contained 485 constituents.
The new index utilizes the MSCI China A Index as its starting universe but targets a more concentrated portfolio of 50 large-cap constituents while maintaining sector neutrality relative to the parent index.
The methodology first selects the two largest stocks from each GICS sector then continues to select the largest stocks from the remaining universe until the 50 constituent count is reached.
Constituents are weighted by float-adjusted market capitalization on a quarterly basis while setting the weight of each GICS sector equal to its weight in the parent index.
According to MSCI, the methodology delivers an index that provides a diversified measure across the Chinese economy while ensuring that the leaders from each sector are represented.
The decision to switch the fund’s index follows the Stock Exchange of Hong Kong’s introduction in October 2021 of futures contracts based on the MSCI China A 50 Connect Index. These futures contracts, designed for offshore investors, represent the first officially recognized risk management tools for Stock Connect-eligible A-shares.
Due to the presence of futures based on the underlying index, the ETF is now expected to reap certain benefits. These include a reduction in tracking error and bid-ask spreads given that market makers can directly hedge their exposure, and lower creation/redemption fees for authorized participants transacting in large blocks of shares.
Jonathan Krane, CEO of KraneShares, said: “KBA is the first MSCI-linked China A-Share ETF in the United States and is now the first US-listed ETF to track the MSCI China A 50 Connect Index. Since we launched KBA in 2014, we have evolved the fund alongside MSCI based on the latest developments in the China A-share market. We believe that we are reflecting the future of China A-share investing.”
Brendan Ahern, CIO of KraneShares, added: “Through tracking the MSCI China A 50 Connect Index, KBA will focus on the largest, most liquid stocks which receive the majority of foreign interest and inflows. Additionally, according to the Financial Times, three (Hong Kong-listed) Mainland ETFs that track the MSCI China A 50 Connect Index saw over $4.5 billion inflows in November alone. We believe the growing demand from domestic and international investors could provide a potential catalyst for KBA.”