Krane Funds Advisors (KraneShares) has launched the actively managed KraneShares Dynamic Emerging Markets Strategy ETF (NYSE Arca: KEM). KEM provides exposure to broad emerging market equities while dynamically adjusting its weight to China based on real-time signals.
KEM actively allocates between China and emerging markets ex China by primarily investing in the KraneShares MSCI All China Index ETF (KALL ) and the KraneShares MSCI Emerging Markets ex China Index ETF (KEMX ). This strategy could potentially mitigate downside risk while outperforming its benchmark, the MSCI Emerging Markets Index.
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Treating China as a Distinct Asset Class
According to KraneShares COO Jonathan Shelon, “investors can potentially achieve better returns by treating China as a distinct asset class within their EM portfolio.”
“China has the world’s second-largest equity market and has shown differentiated historical performance as evidenced by its low correlation to global equity markets,” Shelon added. “Our goal with KEM is to provide investors a powerful tool that leverages our best thinking on how to approach investing in EM.”
KEM’s strategy is rooted in enhanced strategic allocation, systematic overlay and risk management, and adaptability to market conditions. The fund begins with a baseline allocation that mirrors the MSCI Emerging Markets Index weightings. Within the index, China and Emerging Markets ex China are currently set at 31% and 69%, respectively.
The allocation between China and Emerging Markets ex China is adjusted based on weighted valuation signals for the underlying holdings. This allows for a maximum of 30% overweight/underweight compared to the strategic allocation. Additionally, the strategy can allocate up to 10% to cash based on market conditions.
The fund is continuously monitored and adjusted at least quarterly. Adjustments can also occur more frequently to ensure that the portfolio remains aligned with its objectives.
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