We’ve Been Here Before: A Historical Look at KWEB Returns

On July 31st, 2018, the KraneShares CSI China Internet ETF (NYSE: KWEB) had its five-year anniversary. We are extremely proud of accomplishing a five-year track record. Given recent volatility, there was no time for a champagne toast, but looking at our returns we still find plenty of reason to celebrate. As of July 31, 2018, KWEB was the number one performing U.S. listed China ETF (1), and the number one fund in the Morningstar China region category over the past five years (2). KWEB achieved a five-year return of 130% cumulative and 18.14% annualized, beating the S&P 500, which returned 85.18% and 13.11% respectively over the same time period (3). Looking at KWEB’s historical performance we can see that each major contraction has subsequently been met with a period of even greater expansion. Click here for standard performance as of most recent month-end.

KWEB has never moved in a straight line. Over the past five-years, KWEB has had five previous drawdowns of more than 10%.

The summer of 2015 was particularly difficult as two distinct factors converged to weigh on KWEB’s performance. First, a fall in mainland Chinese stocks initiated a difficult macro environment that spread to U.S. listed Chinese companies. Second, Alibaba’s earnings on August 12, 2015, missed analyst expectations leading to a big drop in BABA’s stock and KWEB.

What happened next? Let’s look at what KWEB did after each of these down moves of more than 10%.

Declines of 10% to 35% were followed by rebounds of 25% to 116%. On average, these declining periods were down 20% and lasted 63 days, while rebound periods were up 45% and lasted 244 days. Of course, no one likes to see their investments decline, and the toughest part of investing is maintaining the emotional fortitude to ride out, or harder still, increase a position during a downturn. But history shows that performance has the potential to rebound quickly.

We believe that in challenging moments it is important to revisit KWEB’s core thesis and assess whether it still remains intact. China is rebalancing its economy from exports to domestic consumption. In 2013 the services sector surpassed the industrial sector for the first time as the largest contributor to China’s GDP (4). Retail sales have expanded steadily, reaching $5.8 trillion in 2017 (5). Chinese E-Commerce sales have nearly quadrupled to $1.14 Trillion since KWEB listed (5), and China’s E-Commerce market size is now over twice the size of the United States’ E-Commerce market (6). At the same time only 52.2% of China’s population (721 million people) have access to the internet compared to 88.5% of the U.S. population (287 million people) (7).

Based on these statistics the macro environment in China is ripe for domestic internet companies to thrive. While China’s BAT internet giants: Baidu (8), Alibaba (9) and Tencent (10) have become household names amongst U.S. investors, KWEB holds 43 additional Chinese internet stocks that also stand to benefit from China’s macro environment. Additionally, there is a steady pipeline of large Chinese internet companies which may go public. Of the currently private companies with valuations over a billion dollars tracked in the CBINSIGHTS Global Unicorn club, 78 of 261 companies are from China (8). Looking at the table below of the top ten private Chinese unicorns, any one of them could be the next BAT company, and at least seven of them could potentially qualify for inclusion within KWEB if they were to go public.

While the road can be bumpy, we believe the reward potential is great and that we are still in the early innings of the China internet sector’s growth story. As always, we are available to share our perspective if you have any questions about the market. Click here to contact us.

1. Data from Bloomberg as of 7/31/2018, retrieved 8/07/2018
2. Data from Morningstar as of 7/31/2018 retrieved 8/07/2018
3. Data from Bloomberg as of 7/31/2018
4. Data from Bloomberg as of 12/31/2017, retrieved 6/30/2018
5. National Bureau of Statistics in China, “Total Retail Sales of Consumer Goods in December 2017”. Retrieved on 1/25/2018. Note: Figures converted from Renminbi to USD.
6. U.S. Department of Commerce, “Quarterly Retail E-commerce Sales 4th Quarter 2017”. Retrieved on 2/16/2018.
7. Data from internetlivestats.com as of 31 December 2016. Retrieved on 6/30/2018.
8. Data from CBINSIGHTS as of 8/16/2018
9. Baidu % of KWEB net assets as of 8/17/2018: 8.79%
10. Alibaba % of KWEB net assets as of 8/17/2018: 9.67%
11. Tencent % of KWEB net assets as of 8/17/2018: 10.14%

The KraneShares ETFs are distributed by SEI Investments Distribution Company (SIDCO), 1 Freedom Valley Drive, Oaks, PA 19456, which is not affiliated with Krane Funds Advisors, LLC, the Investment Adviser for the Fund. Additional information about SIDCO is available on FINRA’s BrokerCheck.

©2018 Krane Funds Advisors, LLC

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Carefully consider the Funds' investment objectives, risk factors, charges and expenses before investing. This and additional information can be found in the Funds' full & summary prospectus, which may be obtained here: KWEB, KBA, OBOR, KGRN, KARS, KURE, KEMQ, KCNY, KFYP, KALL,KCCB 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. ETF shares are not redeemable with the issuing fund other than in large Creation Unit aggregations. Instead, investors must buy or sell ETF Shares in the secondary market with the assistance of a stockbroker. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling. The NAV of the Fund’s shares is calculated each day the national securities exchanges are open for trading as of the close of regular trading on the New York Stock Exchange (“NYSE”), normally 4:00 p.m. Eastern time (the “NAV Calculation Time”). Shares are bought and sold at market price (closing price) not NAV. Market price returns are based on the midpoint of the bid/ask spread at 4:00 pm Eastern Time (when NAV is normally determined).

The Funds are subject to political, social or economic instability within China which may cause decline in value. Fluctuations in currency of foreign countries may have an adverse effect to domestic currency values. Emerging markets involve heightened risk related to the same factors as well as increase volatility and lower trading volume.

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. Technology companies may be subject to severe competition and rapid obsolescence. The KraneShares CSI China Internet ETF, the KraneShares MSCI One Belt One Road ETF, the KraneShares Zacks New China ETF, the KraneShares Emerging Markets Consumer Technology ETF, the KraneShares MSCI China Environment ETF, the KraneShares Electric Vechicles and Future Mobility Index ETF, the KraneShares MSCI All China Health Care Index ETF, and the KraneShares CCBS China Corporate High Yield Bond USD Index ETF are non-diversified.

The ability of the KraneShares Bosera MSCI China A ETF, the KraneShares MSCI All China Index ETF, the KraneShares MSCI One Belt One Road ETF, the KraneShares Emerging Markets Consumer Technology ETF, the KraneShares Electric Vechicles and Future Mobility Index ETF, and the KraneShares MSCI All China Health Care Index ETF to achieve their respective investment objectives is dependent, in part, on the continuous availability of A Shares and the ability to obtain, if necessary, additional A Shares quota. If a Fund is unable to obtain sufficient exposure to limited availability of A Share quota, the Fund could seek exposure to the component securities of the Underlying Index by investment in other types of securities. The funds may in invest in derivatives, which are often more volatile than other investments and may magnify the Funds’ gains or losses.

The KraneShares E Fund China Commercial Paper ETF & The KraneShares CCBS China Corporate High Yield Bond USD Index ETF are subject to interest rate risk, which is the chance that bonds will decline in value as interest rates rise. The components of the securities held by these Funds 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 and consequently more volatile. These Funds are subject to industry concentration risk and is non-diversified. Narrowly focused investments typically exhibit higher volatility.

The KraneShares CCBS China Corporate High Yield Bond USD Index ETF invests in perpetual bonds, which offer fixed return with no maturity date. Perpetual bonds can be more volatile than other types of bonds that have a maturity date and may be more sensitive to changes to interest rates.

The KraneShares CCBS China Corporate High Yield Bond USD Index ETF depends on the CIBM Program to invest directly in RMB Bonds. There is no guarantee the Fund will be able to continue to participate in the program.

The KraneShares MSCI All China Health Care Index ETF invests primarily in the health care industry. The profitability of companies in the healthcare sector may be affected by government regulations and government healthcare programs, government reimbursement for medical expenses, increases or decreases in the cost of medical products and services, limited product lines, increased emphasis on the delivery of healthcare through outpatient services and product liability claims. Many healthcare companies are heavily dependent on patent protection, which may be time consuming and costly, and the expiration of a company’s patent may adversely affect that company’s profitability. Healthcare companies are subject to competitive forces that may result in pricing pressure, including price discounting, and may be thinly capitalized and susceptible to product obsolescence. Many new products in the healthcare sector require significant research and development and may be subject to regulatory approvals, which may be time consuming and costly and with no guarantee that the product will come to market.

Indices are unmanaged and do not include the effect of fees. One cannot invest directly in an index.

The KraneShares ETFs are distributed by SEI Investments Distribution Company (SIDCO), 1 Freedom Valley Drive, Oaks, PA 19456, which is not affiliated with Krane Funds Advisors, LLC, the Investment Adviser for the Fund.

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