The combination of a middling Process Pillar rating and a Low People Pillar rating limit  KraneShares CSI China Internet ETF to a Morningstar Medalist Rating of Neutral.  The portfolio maintains a cost advantage over competitors, priced within the second-lowest 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 volatility exposure compared with category peers. High liquidity exposure is attributed to stocks with a high trading volume, lending managers more flexibility. And high volatility exposure is rooted in stocks that have a higher standard deviation of returns. Even though the strategy's parent organization has some investor-friendly attributes like notable personal investments from managers, a bench of limited-tenure portfolio managers holds it back. As a result, the firm obtains 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 CSI China Internet ETF earns an Average Process Pillar rating. The main driver of 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. The process is limited by the fund's unimpressive long-term risk-adjusted performance. This can be seen in its five-year alpha calculated relative to the category average, which suggests that the process has struggled over that period.

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 CSI Overseas China Internet 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 index is designed to measure the equity market performance of investable publicly traded "China-based companies" whose primary business or businesses are in the Internet and Internet-related sectors, and are listed outside of Mainland China, and as determined by the index provider. The fund is non-diversified. 

 The portfolio is overweight in communication services and consumer cyclical relative to the category average by 18.3 and 16.1 percentage points, respectively. The sectors with low exposure compared to category peers are financial services and technology, underweight the average by 14.5 and 9.7 percentage points of assets, respectively. The strategy owns 33 securities and is relatively top-heavy. Of the strategy's assets, 62.3% are concentrated within the top 10 holdings, compared to the category’s 36.9% average. And in closing, in terms of portfolio turnover, on a year-over-year basis, 60% of the fund's holdings have turned over, whether through increasing, decreasing, or changing a position.

Average

Process

Kraneshares’s team receives a Low People Pillar rating. The primary driver of 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 detracts from the team. The parent firm's five-year success ratio of 50% further limits the team. The measure indicates the percentage of a firm's funds that survived and beat 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 CSI China Internet ETF

KWEB tracks a market cap-weighted index composed of overseas-listed Chinese Internet companies.

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