KraneShares has introduced a new China-focused fixed income ETF providing exposure to renminbi-denominated securities included in the Bloomberg Barclays Global Aggregate Index.
The fund is the first ETF to target renminbi-denominated securities included within the Bloomberg Barclays Global Aggregate Index.
The KraneShares Bloomberg Barclays China Bond Inclusion ETF (KBND US) is available to trade on NYSE Arca and comes with an expense ratio of 0.50%.
The fund was created by repurposing one of KraneShares’ less popular ETFs that invested in renminbi-denominated commercial paper.
China’s $17 trillion bond market is the second-largest in the world but, until relatively recently, has not been represented in major global fixed income indices due to concerns over liquidity and investor access.
This is no longer the case as a series of operational enhancements in recent years as well as continued financial market liberalization by the Chinese government has led to several index providers beginning to incorporate the country within their benchmarks.
Bloomberg completed the inclusion of Chinese securities within its global aggregate index in November 2020, while JP Morgan finished adding Chinese government bonds within the JPMorgan GBI-EM Index the following month. FTSE Russell, meanwhile, is scheduled to begin the inclusion process for its FTSE World Government Bond Index in October 2021 in a series of stages that will take approximately three years to complete.
The Bloomberg Barclays Global Aggregate Index, or Agg, is arguably the preeminent barometer of the global fixed income market with more than a trillion dollars tracking or benchmarked to it. Analysts estimated the inclusion of Chinese securities, which account for approximately 6% of the index, drove over $150 billion of new money into China’s onshore bond market as well as significantly expanding the universe of international investors participating in the country.
“The inclusion of RMB-denominated bonds in Bloomberg’s fixed income indexes is a significant development for China’s integration with global financial markets,” said Steve Berkley, CEO of Bloomberg Index Services.
Methodology
The ETF targets Chinese onshore bonds included in the Bloomberg Barclays Global Aggregate Index by tracking the Bloomberg Barclays China Inclusion Focused Bond Index.
The index includes renminbi-denominated fixed-rate securities issued into the China Interbank Bond Market by the Chinese government, certain Chinese policy banks (the Agricultural Development Bank of China, China Development Bank, and Export-Import Bank of China), and Chinese corporations. Eligible securities must have an investment-grade rating and satisfy minimum par value thresholds – RMB 5bn for government and policy bank bonds and RMB 1.5bn for corporate bonds.
The weight of Chinese government bonds and policy bank bonds are each set to 25% in the index, while corporate bonds make up the remaining 50%. Constituents are weighted by market value while capping the weight of corporate issuers at 4.5%.
The ETF provides investors with a new source of yield while staying within the investment-grade universe. With low correlations to other major bond markets, the fund may also enhance the diversification of traditional fixed income portfolios.
Jonathan Krane, CEO of KraneShares, said: “With attractive yields, low correlations, low sovereign risk, and ratings from international agencies, we believe China’s bond market presents a compelling opportunity. We are proud to partner with Bloomberg on KBND to bring new access to China’s fixed income market to our clients.”
Distributions are made on a monthly basis.