Potential applications of China commercial paper in portfolios

Transcription

1 Potential applications of China commercial paper in portfolios KraneShares E Fund China Commercial Paper ETF (NYSE:KCNY) Diversify your cash with KCNY Aaron Dillon aaron.dillon@kraneshares.com Brendan Ahern brendan.ahern@kraneshares.com

2 The KraneShares E Fund China Commercial Paper ETF (NYSE: KCNY) is an exchange traded fund investing into money market securities. We believe China commercial paper delivers superior yield & similar stability vs. US money market funds and US bank deposit programs. Investment Strategy The KraneShares E Fund China Commercial Paper ETF (NYSE: KCNY) seeks to track the CSI Diversified High Grade Commercial Paper Unhedged Index. The Fund seeks to deliver a diversified basket of investment-grade 1 commercial paper denominated in on-shore renminbi issued by sovereign, quasisovereign and corporate issuers in the People s Republic of China and traded in the inter-bank bond market. Commercial paper in the Fund is investmentgrade and has a remaining term to final maturity of no more than one year and no less than one month. China commercial paper may be appropriate for customers who have a(n) allocation to investment products that only invest in money market securities investment goal with a short time horizon low tolerance for volatility daily liquidity requirement desire to diversify their cash-equivalent holdings The KraneShares E Fund China Commercial Paper ETF is not a money market fund. 1.) For purposes of the Underlying Index, investment grade commercial paper is commercial paper that is issued by an issuer whose long-term bonds are rated AAA or equivalent by one or more Chinese credit rating agencies; or commercial paper that is issued by an issuer whose long-term bonds are rated AA+ or equivalent by one or more Chinese credit rating agencies and commercial paper is rated A-1 or equivalent by one or more Chinese credit rating agencies 2

3 Potential benefits of investing in China commercial paper: 1 Yield: China commercial paper has outperformed US commercial paper and USD bank deposits over the past year 8.00% 6.00% 5.85% Trailing 12 months total return as of 9/2014 Source: Bloomberg as of 9/30/ % 2.00% 0.00% 0.20% 0.16% ChinaBond Commercial Paper Index TR (USD) S&P US Commercial Paper Index TR USD Deposit Rates (1M term, retail) The Fund was incepted on 12/02/2014 and does not have historical performance yet. Index performance is for illustrative purposes only and is not intended to serve as a proxy for the Fund's future performance. 3

4 Potential benefits of investing in China commercial paper: 2 Historical Stability: China commercial paper has produced minimal downside deviation 1 since 10/31/ ,000 Growth of $10,000 (10/31/2008 to 9/30/2014) 14,000 ChinaBond Commercial Paper Index TR (USD) S&P US Commercial Paper Index TR 13,000 USD Deposit Rates (1M term, retail) 12,000 11,000 10,000 9,000 START 10/31/09 10/31/10 10/31/11 10/31/12 10/31/13 ChinaBond Commercial Paper Index Total Return: Represents commercial paper and super & shortterm commercial paper trading in RMB on the interbank bond market. S&P US Commercial Paper Index Total Return: consists of commercial paper with one to three month maturities from both the financial and nonfinancial sectors. USD Deposit Rates (1M term, retail): Interest rate received for deposits into a FDIC insured bank account with 1 month lock-up. 1.) Downside Deviation: A measure of downside risk that focuses on returns that fall below zero threshold or minimum acceptable return (MAR). 2.) The ChinaBond Commercial Paper Index Total Return was incepted on 10/31/2008 The Fund was incepted on 12/02/2014 and does not have historical performance yet. Index performance is for Source: Bloomberg as of 9/30/2014 illustrative purposes only and is not intended to serve as a proxy for the Fund's future performance. 4

5 We believe KCNY has the following potential applications in portfolios. The ETF may act as a replacement or compliment in each opportunity. (1) Cash sweep programs (2) Certificates of deposit (3) Income portfolio 5

6 Cash sweep programs: Many brokerages or custodians sweep investor cash to a bank deposit program. Average annual yields for cash sweep programs are 0.01% 1,2. We believe that investors with a desire to increase total returns in their cash allocations may want to diversify and include KCNY. Over the past 5 years, adding China commercial paper to a hypothetical cash allocation would have increased yield. Average annual yields for cash sweep programs are 0.01% 1,2 1. Source: imoneynet.com as of 12/09/ Cash Sweep Program: Taxable U.S. money market funds Historical total returns of a blended US bank deposit and China commercial paper portfolio as of 09/30/2014 Portfolio Allocation % 1M 3M 6M YTD 1YR 3YR 5YR Since Inception (ChinaBond Commercial China US bank Commercial deposits Paper Index TR) Paper 10/31/2008 Portfolio #1 0% 100% 0.01% 0.04% 0.08% 0.12% 0.16% 0.54% 0.99% 1.37% Portfolio #2 25% 75% 0.14% 0.64% 1.13% 0.94% 1.50% 5.60% 9.90% 11.32% Portfolio #3 50% 50% 0.27% 1.23% 2.18% 1.75% 2.85% 10.65% 18.81% 21.27% Portfolio #4 75% 25% 0.39% 1.83% 3.22% 2.57% 4.19% 15.71% 27.72% 31.23% Source: Bloomberg September 30, 2014: Portfolio examples are for illustrative purposes only and do not represent actual portfolios. Index returns are for illustrative purposes only and do not represent fund performance. Index performance returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest in an index. Past performance does not guarantee future results. 6

7 Certificates of deposit ( CDs ): There are $10.1 trillion in time deposits (aka CDs) and savings deposits in private depository institutions in the United States 1. As of 09/30/2014, a one year CD offered a 0.37% interest rate 2. We believe that investors can replace or compliment a CD portfolio with KCNY. Potential benefits of replacing or complimenting a CD portfolio with KCNY: May add liquidity to the portfolio; KCNY has intra-day liquidity, many one year CDs have early termination fees China commercial paper has outperformed US CDs, historically KCNY offers monthly distributions vs a one year CD that may not offer monthly distributions Historical total returns of a US certificates of deposit and China commercial paper portfolio as of 09/30/2014 Portfolio Allocation % 1YR 2YR 3YR 5YR Since Inception (ChinaBond China Commercial US certificate of Commercial Paper deposit Paper Index TR) 10/31/2008 Portfolio #1 0% 100% 0.38% 1.18% 1.98% 4.08% 4.08% Portfolio #2 25% 75% 2.08% 4.26% 7.45% 11.67% 11.67% Portfolio #3 50% 50% 3.79% 7.33% 12.91% 19.26% 19.26% Portfolio #4 75% 25% 5.49% 10.41% 18.38% 26.84% 26.84% Source: Bloomberg September 30, 2014: Portfolio examples are for illustrative purposes only and do not represent actual portfolios. Index returns are for illustrative purposes only and do not represent fund performance. Index performance returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest in an index. Past performance does not guarantee future results. 1. Federal Reserve, Sep Bloomberg 7

8 Income portfolio: Many investors in the United States are nearing or in retirement and leverage their investment portfolios to generate monthly income to cover living expenses. Yields in the US are at historic lows and some investors are moving into longer duration, lower credit quality or alternative asset classes in the search for higher yields. We believe investors can include KCNY into their income portfolios to generate higher monthly income while potentially reducing overall portfolio maturity risk and volatility. US ETF trailing 3 year metrics by fixed income asset class as of 09/30/2014 (sorted by Power Rank) Asset Class Total Return Downside Deviation Average Maturity Power Rank % Rank % Rank # of Years Rank (Total Return x Downside Deviation x Average Maturity) ChinaBond Commercial Paper Index TR (USD) 20.8% % US ETF Ultrashort Bond 2.5% % US ETF High Yield Bond 27.6% % US ETF Bank Loan 21.6% % US ETF Short-Term Bond 5.5% % US ETF Nontraditional Bond 6.5% % US ETF Preferred Stock 23.4% % US ETF Intermediate-Term Bond 10.7% % US ETF Corporate Bond 15.5% % US ETF Long-Term Bond 19.5% % US ETF World Bond 10.3% % US ETF Emerging Markets Bond 14.5% % US ETF Inflation-Protected Bond 3.7% % A bond is considered investment grade or IG if its credit rating is BBB- or higher by Standard & Poor's or Baa3 or higher by Moody's. Generally they are bonds that are judged by the rating agency as likely enough to meet payment obligations that banks are allowed to invest in them. For purposes of the Underlying Index, investment grade commercial paper is commercial paper that is issued by an issuer whose long term bonds are rated AAA or equivalent by one or more Chinese credit rating agencies; or commercial paper that is issued by an issuer whose long-term bonds are rated AA+ or equivalent by one or more Chinese credit rating agencies and commercial paper is rated A-1 or equivalent by one or more Chinese credit rating agencies. Source: Bloomberg, Morningstar Direct September 30, 2014: Portfolio examples are for illustrative purposes only and do not represent actual portfolios. Index returns are for illustrative purposes only and do not represent fund performance. Index performance returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest in an index. Past performance does not guarantee future results. 8

9 Thank You For Watching. For further information please call: KRANE8 ( ) China commercial paper may be appropriate for customers who have a(n) allocation to investment products that only invest in money market securities investment goal with a short time horizon low tolerance for volatility daily liquidity requirement desire to diversify their cash-equivalent holdings

10 Carefully consider the Funds' investment objectives, risk factors, charges and expenses before investing. This and additional information can be found in the Funds' prospectus, which may be obtained by visiting Read the prospectus carefully before investing. Investing involves risk, including possible loss of principal. There can be no assurance that a Fund will achieve its stated objectives. The Funds focus their investments primarily with Chinese issuers and issuers with economic ties to China. The Funds are subject to political, social or economic instability within China which may cause a decline in value. Fluctuations in currency of foreign countries may have an adverse effect on domestic currency values. Emerging markets involve heightened risk related to the same factors as well as increased volatility and lower trading volume. Current and future holdings are subject to risk. The KraneShares E Fund China Commercial Paper ETF is subject to interest rate risk, which is the chance that bonds will decline in value as interest rates rise. It is also subject to income risk, call risk, credit risk, and Chinese credit rating risks. The components of the securities held by the Fund will be rated by Chinese credit rating agencies, which may use different criteria and methodology than U.S. entities or international credit rating agencies. The Fund may invest in high yield and unrated securities, whose prices are generally more sensitive to adverse economic changes. As such, their prices may be more volatile. The Fund is subject to industry concentration risk and is nondiversified. The KraneShares E Fund China Commercial paper ETF invests in sovereign and quasi-sovereign debt. Investments in sovereign and quasi-sovereign debt securities involve special risks, including the availability of sufficient foreign exchange on the date a payment is due, the relative size of the debt service burden to the economy as a whole, and the government debtor s policy towards the International Monetary Fund and the political constraints to which a government debtor may be subject. In order to qualify for the favorable tax treatment generally available to regulated investment companies, the Fund must satisfy certain income and asset diversification requirements each year. If the Fund were to fail to qualify as a regulated investment company, it would be taxed in the same manner as an ordinary corporation, and distributions to its shareholders would not be deductible by the Fund in computing its taxable income. Narrowly focused investments typically exhibit higher volatility. Internet companies are subject to rapid changes in technology, worldwide competition, rapid obsolescence of products and services, loss of patent protections, evolving industry standards and frequent new product productions. Such changes may have an adverse impact on performance. The KraneShares ETFs are distributed by SEI Investments Distribution Company, which is not affiliated with Krane Funds Advisors, LLC, the Investment Adviser for the Fund. 10