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KraneShares Switches Index for a China ETF (KFYP)

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KraneShares, famous for its China-centric products, recently changed the index for one ETF based on the China Five Year Plan. Though the name of the fund has undergone a change from CSI Five Year Plan ETF to KraneShares Zacks New China ETF, the ticker symbol is still KFYP.
 
The fund has amassed about $2.8 million in assets so far and trades in a volume of 2,500 shares a day on average. It hit the market in July 2013 (see all Asia-Pacific (Emerging) ETFs here).
 
Inside Index Change
 
Until recently, KFYP used to track the CSI China Overseas Five Year Plan Index. The index invests in publicly traded China-based companies whose businesses are related to the Chinese government’s current Five-Year Plan.
 
But the issuer recently announced that the fund will now be tracking the Zacks New China Index. The Zacks New China Index looks to track the companies listed in Mainland China, Hong Kong and the U.S. whose primary business or businesses are in the targeted industries of China’s 13th Five-Year Plan (read: Can the Year of Monkey Bring Fortune to China ETFs?).
 
The Zacks index assesses the sectors likely to cash in on the Five-Year Plan and chooses companies by deploying a method that employs multi-factor, proprietary selection rules to find out the best possible mix of securities.
 
How Does This Impact Investors?
 
The most prominent change will be in the exposure profile. As of March 31, 2016, the CSI China Overseas Five Year Plan Index held about 105 companies in total. The exposure was concentrated on individual holdings. The fund put a double-digit weight in each of the first three holdings (read: Investors Cheer Alibaba Revenue Growth: ETFs in Focus).
 
But under the Zacks New China Index,  the top 10 largest capitalization stocks will each account for about 3.75%, the middle 20 capitalization stocks will each make up for about 2.5%, and the smallest 10 capitalization stocks will take about 1.25% weight each, per the factsheet. The total number of stocks in the index was 40 as of March 31, 2016.
 
Capitalization wise, the former index was tilted toward large caps (53.9%) as of March 31, 2016, while mid caps account for 40.9% and small-caps account for the rest. On the other hand, the new index puts about 41.27% weight in mid caps, 34.91% in small caps and the rest in large caps as of March 31, 2016. As the Chinese economy is transitioning into a domestically focused economy, added attention to smaller cap stocks should be beneficial for the fund.
 
As of the same date, the former index was heavy on consumer discretionary (34.3%) and technology (33.6%) while the Zacks New China Index puts about 30.9% weight in IT followed by 17.7% in materials and over 10% each in consumer staples and discretionary.
 
Conclusion
 
There are some obvious differences between the old and new benchmarks. The total number of holdings, company-specific concentration risks and changes in the capitalization pattern make the real distinction.
 
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