Market Overview

KraneShares Jumps Into ESG ETF Fray With New China Fund

KraneShares Jumps Into ESG ETF Fray With New China Fund

Putting its deep expertise in China and emerging markets to virtuous use, KraneShares launched the KraneShares MSCI China ESG Leaders ETF (NYSE: KESG) on Wednesday.

What Happened: The new ETF KraneShares exchange-traded fund tracks the MSCI China ESG Leaders 10/40 Index, a member of the popular MSCI ESG Leaders series of indexes, some of which serve as the benchmarks for several of the largest environmental, social and governance (ESG) ETFs in the U.S.

KESG is the second ESG ETF to debut in as many days, following the SPDR S&P 500 ESG ETF (NYSE:EFIV) on Tuesday, adding to what's been a brisk pace of launches in this burgeoning fund category for more than a year.

Why It's Important: An ESG ETF dedicated to China could be seen as a unique approach to stocks in the world's second-largest economy given the country's dubious human rights record and the fact that some successful ETFs in this category explicitly eschew Chinese stocks.

However, some ESG emerging markets ETFs are gaining traction with U.S. investors as scores of academic research suggest a virtuous approach to stocks in developing economies is more rewarding than traditional approaches. Historical data indicate that's the case with Chinese stocks, too.

“Since its inception in July 2013, the MSCI China ESG Leaders Index has outperformed the MSCI China Index by 76%,” according to KraneShares. “The 5-year annualized return of the MSCI China ESG Leaders Index was 10.51% as compared to just 5.32% from the MSCI China Index.”

While China's human rights record leaves something to be desired, its efforts to reduce pollution likely earn it an “A” for the “E” in ESG.

“China's commitment to stricter environmental mandates and conservation efforts is necessary to achieve national goals of sustained economic growth,” notes KraneShares. “Consequently, China now is the world leader in total renewable energy capacity, at approximately 31% of total global capacity.”

What's Next: The new ESG allocates about 19% of its combined weight to Chinese internet titans Tencent (OTC: TCEHY) and Alibaba (NYSE: BABA).

Unlike many of its U.S.-focused counterparts, KESG isn't significantly overweight tech stocks. In fact, that sector is a small slice of the new ETF's pie at just under 5%. Rather, consumer cyclical stocks represent a quarter of the fund's weight while financial services and healthcare names combine for almost 31%.

KESG charges 0.59% per year, or $59 on a $10,000 investment.


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