The combination of a middling Process Pillar rating and a Low People Pillar rating limit  KraneShares CICC China 5G & Smcdtr ETF to a Morningstar Medalist Rating of Neutral.  The portfolio maintains a sizable cost advantage over competitors, priced within the cheapest fee quintile among peers.  

 The team managing the passive strategy earns a Low People Pillar. The strategy merits an Average Process Pillar rating. Independent of the rating, analysis of the strategy's portfolio shows it has maintained a significant overweight position in liquidity exposure and has a substantial underweight in yield exposure compared with category peers. High liquidity exposure is attributed to stocks with a high trading volume, lending managers more flexibility. And a low yield exposure is rooted in holding fewer stocks with high dividend or buyback yields -- instead, typically holding stocks in an early stage of development. Although this strategy's parent firm still has a way to go to be a high-quality steward, it has bright spots like portfolio managers who invest a substantial amount in their strategy but could focus on a relatively inexperienced portfolio management team. As a result, the firm earns a Low Parent Pillar.

Analyst Rating

Morningstar's evaluation of this security's process aims to determine the likelihood that it will outperform its Morningstar Category index on a risk-adjusted basis over the long term. KraneShares CICC China 5G & Smcdtr ETF earns an Average Process Pillar rating. The leading factor in the rating is that this fund tracks an index. Historical data, such as Morningstar's Active/Passive Barometer, finds that passively managed funds have generally outperformed their active counterparts, especially over longer time horizons. Low expenses across its parent firm's funds, whose fees, on average, rank in the second-cheapest quintile of their respective category, also contribute to the process. The pattern of low costs at the firm indicates that it is focused on delivering strong results for investors. Lastly, the process is limited by the parent firm's five-year retention rate of 54%, which suggests it could do more to retain its portfolio managers.

The investment strategy as stated in the fund's prospectus is:  The investment seeks to provide investment results that correspond generally to the price and yield performance of the CICC China 5G and Semiconductor Leaders Index.  The fund will invest at least 80% of its net assets in instruments in its underlying index or in instruments that have economic characteristics similar to those in the underlying index. The securities included in the underlying index include China A-Shares available for investment through the Shanghai-Hong Kong Stock Connect or Shenzhen-Hong Kong Stock Connect Programs and all securities listed in Hong Kong or the United States with China as the country of domicile. It is non-diversified. 

 The portfolio is overweight in technology by 80.0 percentage points in terms of assets compared with the category average, and its industrials allocation is similar to the category. The sectors with low exposure compared to category peers are consumer cyclical and financial services, underweight the average by 23.1 and 17.1 percentage points of assets, respectively. The portfolio is positioned across 52 holdings and is relatively top-heavy. Of the strategy's assets, 48.2% are concentrated within the top 10 holdings, compared to the category’s 36.9% average. And finally, in terms of portfolio turnover, looking at year-over-year movements, 25% of the fund's holdings have changed, whether through increasing, decreasing, or changing a position.

Average

Process

Kraneshares’s team receives a Low People Pillar rating. The largest detractor from the rating is the turnover of talent across its parent firm. The firm's asset-weighted manager tenure of five years suggests it could do more to retain portfolio managers. The combined average five-year excess return of each manager also detracts from the team. It indicates that the funds they manage have fallen short of their respective category's average return. The parent firm's five-year success ratio of 50% further hinders the team. The measure indicates the percentage of a firm's funds that survived and outperformed their respective category's median return for the period. The parent's subpar success ratio suggests that the firm could do better across its fund lineup.

People

Kraneshares has a ways to go to become an industry-standard steward, resulting in a Low Parent Pillar rating. Despite the negative rating, an area of strength of the firm is manager investment.  Over 29% of the firm's assets are covered by invested managers, in an effort to align portfolio manager and shareholder interests. Kraneshares's longest-tenured managers do not possess the same experience as management teams at other firms, a detractor from its rating. Specifically, average asset-weighted tenure within the firm is only five years.

Parent

KraneShares CICC China 5G & Semiconductor Index ETF

KFVG tracks a market-cap weighted index of Chinese companies in the 5G and semiconductor-related industries.

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