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Rookie China ETF Has 2 Kinds Of Green Appeal

November 9, 2020 3:16 pm
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Rookie China ETF Has 2 Kinds Of Green Appeal

China may have been the birthplace of the coronavirus, but give stocks in the world's second-largest economy some credit. Not only is the country rapidly moving past the pandemic, but the MSCI China Index is higher by 29.21% year-to-date.

What Happened: Two corners of both Chinese and U.S. equity markets that's been impressive this year, regardless of the pandemic, is renewable energy and environmental, social and governance (ESG) concepts.

The KraneShares Trust – KraneShares MSCI China ESG Leaders Index ETF (NYSE:KESG), which debuted in late July, is one way of accessing that trend. Rookie status aside – it doesn't mean much – KESG is delivering the goods, jumping 9.64% last week and 17% over the past month.

Why It's Important: KESG follows the MSCI China ESG Leaders 10/40 Index, which holds Chinese companies with favorable ESG grades. Important to the KESG thesis is that the new ETF answers one of investors' primary concerns regarding ESG investing: Does it outperform a traditional benchmark?

“Since the inception of the ESG index in 2013 through 9/30/2020, the MSCI China ESG Leaders Hybrid Index returned 170%, while the MSCI China Index returned 102%, representing an outperformance of 68% for the ESG index over the broad China market,” according to KraneShares research.

Home to 152 stocks, KESG offers the potential to outperform standard China benchmarks for some familiar. First and fortunately, the ETF is light on state-owned enterprises, which typically act as drags on performance in emerging markets.

Second, a China ESG fund, such as KESG, is likely to feature significant exposure to communication services, consumer discretionary and technology stocks, giving the fund a growth feel.

What's Next: This year, ESG ETFs are setting records for asset gathering and that's happening all over the world, not just in the U.S. When it comes to China, institutional investors are expressing interest in ESG concepts, particularly against the backdrop of the country looking to quell one of the world's worst pollution problems. Those factors provide an ideal long-term setup for KESG.

“Global demand for more sustainably focused investments has become more widespread, in part, because ESG scoring is much more accessible,” according to KraneShares. “Moreover, there has been an influx of new funds over the past few years, which provides investors with a growing number of options to better tailor their investments with their personal values. Specific markets, such as China, also lend themselves particularly well to ESG filtering for preferable sector exposure and potentially better returns.”


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