KraneShares CICC China 5G & Smcdtr ETF retains its Morningstar Medalist Rating of Bronze. The portfolio maintains a sizable cost advantage over competitors, priced within the least expensive fee quintile among peers.  

 The strategy's effective investment philosophy supports an Above 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 quality exposure compared with category peers. High liquidity exposure is attributed to stocks with a high trading volume, lending managers more flexibility. And a high quality exposure is rooted in holding stocks with low financial leverage and strong returns on equity. The team managing this passive strategy earns a Low People Pillar rating. 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 considerable amount in their strategy but could focus on a relatively inexperienced portfolio management team. As a result, the firm receives a Below Average Parent Pillar.

Analyst Rating

Morningstar's evaluation of this security's process aims to determine the likelihood that it will outperform its Morningstar Category benchmark on a risk-adjusted basis over the long term. KraneShares CICC China 5G & Smcdtr ETF earns an Above 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 middle quintile of their respective category, also bolster the process. The pattern of low expenses 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 50%, which suggests it could do more to hold onto 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 U.S. with China as the country of domicile. It is non-diversified. 

 The portfolio is overweight in technology by 81.8 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 communication services, underweight the average by 23.9 and 17.3 percentage points of assets, respectively. The portfolio is composed of 32 holdings and is quite concentrated. In particular, 57.4% of the fund’s assets are housed within the top 10 holdings, compared to the category average of 36.8%. And finally, in terms of portfolio turnover, this portfolio turns over its holdings less quickly than peers, potentially leading to lower costs for investors and eliminating a drag on performance.

Above Average

Process

Kraneshares’s team earns a Low People Pillar rating. The main 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 managers' failure to consistently outperform peers at the funds they run, as measured by their combined three-year manager excess returns, also holds the team back. Furthermore, none of the managers have put more than $1 million of their own money in the fund, which would align their interests with fundholders.

People

Kraneshares fails to meet industry-standard stewardship qualities, culminating in a Below Average Parent Pillar rating. Aside from the overall view, portfolio managers at Kraneshares have made a notable effort to align their interests with shareholders' by taking a personal stake and investing alongside them. Nearly 30% of the firm’s assets are represented by a manager who invests in their respective product. A notable weakness of Kraneshares is the inexperience of its longest-tenured managers compared with other asset managers. Managing capital through a full market cycle is a challenging prospect for seasoned managers, but with only five years of average asset-weighted tenure, there's cause for concern.

Below Average

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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