Annual Report

KraneShares CICC China Leaders 100 Index ETF

KraneShares CSI China Internet ETF

KraneShares Bosera MSCI China A Share ETF

KraneShares E Fund China Commercial Paper ETF

KraneShares MSCI All China Index ETF

KraneShares MSCI One Belt One Road Index ETF

KraneShares Emerging Markets Consumer Technology Index ETF

KraneShares MSCI China Clean Technology Index ETF

(Formerly, KraneShares MSCI China Environment Index ETF)

KraneShares Electric Vehicles and Future Mobility Index ETF

KraneShares MSCI All China Health Care Index ETF

KraneShares CCBS China Corporate High Yield Bond USD Index ETF

KraneShares Emerging Markets Healthcare Index ETF

KraneShares MSCI Emerging Markets ex China Index ETF

KraneShares MSCI China ESG Leaders Index ETF

KraneShares Global Carbon ETF

(Formerly KFA Global Carbon ETF)

KraneShares CICC China 5G & Semiconductor Index ETF

KraneShares CICC China Consumer Leaders Index ETF

KraneShares SSE STAR Market 50 Index ETF

March 31, 2021

   

 

Table of Contents

Shareholder Letter

 

1

Management Discussion of Fund Performance

 

4

Schedules of Investments/Consolidated Schedule of Investments

   

KraneShares CICC China Leaders 100 Index ETF

 

71

KraneShares CSI China Internet ETF

 

75

KraneShares Bosera MSCI China A Share ETF

 

78

KraneShares MSCI All China Index ETF

 

90

KraneShares MSCI One Belt One Road Index ETF

 

98

KraneShares Emerging Markets Consumer Technology Index ETF

 

104

KraneShares MSCI China Clean Technology Index ETF

 

108

KraneShares Electric Vehicles and Future Mobility Index ETF

 

111

KraneShares MSCI All China Health Care Index ETF

 

117

KraneShares CCBS China Corporate High Yield Bond USD Index ETF

 

120

KraneShares Emerging Markets Healthcare Index ETF

 

123

KraneShares MSCI Emerging Markets ex China Index ETF

 

128

KraneShares MSCI China ESG Leaders Index ETF

 

140

KraneShares Global Carbon ETF

 

145

KraneShares CICC China 5G & Semiconductor Index ETF

 

147

KraneShares CICC China Consumer Leaders Index ETF

 

149

KraneShares SSE STAR Market 50 Index ETF

 

151

Statements of Assets and Liabilities/Consolidated Statement of Assets and Liabilities

 

153

Statements of Operations/Consolidated Statements of Operations

 

159

Statements of Changes in Net Assets/Consolidated Statements of Changes in Net Assets

 

165

Financial Highlights/Consolidated Financial Highlights

 

180

Notes to Financial Statements/Consolidated Notes to Financial Statements

 

186

Report of Independent Registered Public Accounting Firm

 

218

Trustees and Officers of the Trust

 

221

Liquidity Risk Management Program

 

224

Approval of Advisory Agreements

 

225

Disclosure of Fund Expenses

 

231

Notice to Shareholders

 

234

Supplemental Information

 

236

The Funds file their complete schedules of Fund holdings with the Securities and Exchange Commission (the “Commission”) for the first and third quarters of each fiscal year as an exhibit to its reports on Form N-PORT within sixty days after the end of the period. The Funds’ Form N-PORT reports are available on the Commission’s website at http://www.sec.gov, and may be reviewed and copied at the Commission’s Public Reference Room in Washington, DC. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330.

A description of the policies and procedures that KraneShares Trust uses to determine how to vote proxies relating to Fund securities, as well as information relating to how the Funds voted proxies relating to Fund securities during the most recent 12-month year ended June 30, are available (i) without charge, upon request, by calling 855-857-2638; and (ii) on the Commission’s website at http://www.sec.gov.

Fund shares may only be purchased or redeemed from a Fund in large Creation Unit aggregations. Investors who cannot transact in Creation Units of a Fund’s shares must buy or sell Fund shares in the secondary market at their market price, which may be at a premium or discount to a Fund’s net asset value, with the assistance of a broker. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying Fund shares and receive less than net asset value when selling Fund shares.

 

Shareholder Letter (Unaudited)

Dear Shareholders:

We are pleased to send you the Annual Report for KraneShares Exchange-traded funds (“ETFs”) for the 12-month period ended March 31, 2021.

For the period, the ETFs delivered the following returns:

Fund

 

Return

 

Underlying
Index
Return*

 

Morningstar
Peer Group
Median

Return

KraneShares CICC China Leaders 100 Index ETF (KFYP)

 

28.90

%

 

32.82

%(a)

 

50.39

%(1)

KraneShares CSI China Internet ETF (KWEB)

 

67.77

%

 

69.26

%(b)

 

50.39

%(1)

KraneShares Bosera MSCI China A Share ETF (KBA)

 

50.00

%

 

51.10

%(c)

 

50.39

%(1)

KraneShares E Fund China Commercial Paper ETF (KCNY)

 

9.91

%

 

10.72

%(d)

 

13.47

%(2)

KraneShares MSCI All China Index ETF (KALL)

 

47.97

%

 

45.82

%(e)

 

50.39

%(1)

KraneShares MSCI One Belt One Road Index ETF (OBOR)

 

65.82

%

 

67.58

%(f)

 

27.03

%(3)

KraneShares Emerging Markets Consumer Technology Index ETF (KEMQ)

 

67.85

%

 

69.26

%(g)

 

62.08

%(4)

KraneShares MSCI China Clean Technology Index ETF (KGRN)

 

143.03

%

 

133.24

%(h)

 

50.39

%(1)

KraneShares Electric Vehicles and Future Mobility Index ETF (KARS)

 

122.46

%

 

124.89

%(i)

 

73.58

%(5)

KraneShares MSCI All China Health Care Index ETF (KURE)

 

61.06

%

 

63.50

%(j)

 

50.39

%(1)

KraneShares CCBS China Corporate High Yield Bond USD Index ETF (KCCB)

 

12.32

%

 

12.75

%(k)

 

19.30

%(6)

KraneShares Emerging Markets Healthcare Index ETF (KMED)

 

60.18

%

 

62.23

%(l)

 

62.08

%(4)

KraneShares MSCI Emerging Markets ex China Index ETF (KEMX)

 

71.19

%

 

68.77

%(m)

 

62.08

%(4)

KraneShares MSCI China ESG Leaders Index ETF (KESG)

 

29.05

%^

 

30.84

%(n)

 

N/A

(1)

KraneShares Global Carbon ETF (KRBN)

 

41.95

%^

 

41.52

%(o)

 

N/A

(N/A)

KraneShares CICC China 5G & Semiconductor Index ETF (KFVG)

 

-7.68

%^

 

-6.81

%(p)

 

N/A

(1)

KraneShares CICC China Consumer Leaders Index ETF (KBUY)

 

3.28

%^

 

4.12

%(q)

 

N/A

(1)

KraneShares SSE STAR Market 50 Index ETF (KSTR)

 

-15.76

%^

 

-16.59

%(r)

 

N/A

(1)

*       Return as of March 31, 2021

^      Return period since Fund inception (less than one-year period):

KraneShares MSCI China ESG Leaders Index ETF, the Fund commenced operations on July 28, 2020.

KraneShares Global Carbon ETF, the Fund commenced operations on July 29, 2020.

KraneShares CICC China 5G & Semiconductor Index ETF, the Fund commenced operations on November 23, 2020.

KraneShares CICC China Consumer Leaders Index ETF, the Fund commenced operations on December 8, 2020.

KraneShares SSE STAR Market 50 Index ETF, the Fund commenced operations on January 26, 2021.

Morningstar 
Peer Group
Median Return

 

Morningstar Peer Group Name

 

(1)

50.39%

 

U.S. ETF China Region

 

(2)

13.47%

 

U.S. ETF Emerging Markets Local Currency Bond

 

(3)

27.03%

 

U.S. ETF Infrastructure

 

(4)

62.08%

 

U.S. ETF Diversified Emerging Markets

 

(5)

73.58%

 

U.S. ETF Industrials

 

(6)

19.30%

 

U.S. ETF Emerging Markets Bond

 

1

Shareholder Letter (Unaudited) (continued)

(a)    The underlying index for KraneShares CICC China Leaders 100 Index ETF.

(b)    The underlying index for KraneShares CSI China Internet ETF.

(c)    The underlying index for KraneShares Bosera MSCI China A Share ETF.

(d)    The underlying index for KraneShares E Fund China Commercial Paper ETF.

(e)    The underlying index for KraneShares MSCI All China Index ETF.

(f)     The underlying index for KraneShares MSCI One Belt One Road Index ETF.

(g)    The underlying index for KraneShares Emerging Markets Consumer Technology Index ETF.

(h)    The underlying index for KraneShares MSCI China Clean Technology Index ETF.

(i)     The underlying index for KraneShares Electric Vehicles and Future Mobility Index ETF.

(j)     The underlying index for KraneShares MSCI All China Health Care Index ETF.

(k)    The underlying index for KraneShares CCBS China Corporate High Yield Bond USD Index ETF

(l)     The underlying index for KraneShares Emerging Markets Healthcare Index ETF.

(m)    The underlying index for KraneShares MSCI Emerging Markets ex China Index ETF.

(n)    The underlying index for KraneShares MSCI China ESG Leaders Index ETF.

(o)    The underlying index for KraneShares Global Carbon ETF.

(p)    The underlying index for KraneShares CICC China 5G & Semiconductor Index ETF.

(q)    The underlying index for KraneShares CICC China Consumer Leasers Index ETF.

(r)     The underlying index for KraneShares SSE Star Market 50 Index ETF.

The Morningstar Fund China Region Category portfolios invest almost exclusively in stocks from China, Taiwan, and Hong Kong. These portfolios invest at least 70% of total assets in equities and invest at least 75% of stock assets in one specific region or a combination of China, Taiwan, and/or Taiwan.

The Morningstar Fund Diversified Emerging Markets Category portfolios tend to divide their assets among 20 or more nations, although they tend to focus on the emerging markets of Asia and Latin America rather then those of the Middle East, Africa, or Europe. These portfolios invest predominantly in emerging market equities, but some funds also invest in both equities and fixed income instruments among emerging markets.

The Morningstar Fund Emerging Markets Bond portfolios invest more than 65% of their assets in foreign bonds from developing countries. The largest portion of the emerging-markets bond market comes from Latin America, followed by Eastern Europe. Africa, the Middle East, and Asia make up the rest.

The Morningstar Fund Industrials Category portfolios seek capital appreciation by investing in equity securities of US or non-US companies that are engaged in services related to cyclical industries. This includes and is not limited to companies in aerospace and defense, automotive, chemicals, construction, environmental services, machinery, paper and transportation.

The Morningstar Fund Infrastructure Category portfolios invest more than 60% of their assets in stocks of companies engaged in infrastructure activities. Industries considered to be part of the infrastructure sector include: oil & gas midstream; waste management; airports; integrated shipping; railroads; shipping & ports; trucking; engineering & construction; infrastructure operations; and the utilities sector.

The Morningstar Fund Emerging Markets Local Currency Bond Category portfolios invest more than 65% of their assets in foreign bonds from developing countries in the local currency. Funds in this category have a mandate to maintain exposure to currencies of emerging markets. The largest portion of the emerging markets bond market comes from Latin America, followed by Eastern Europe, Africa, the Middle East, and Asia.

2

 

Shareholder Letter (Unaudited) (concluded)

We are encouraged by the steady progress being made by China to increase access to local and Mainland Chinese markets for international investors, as well as by the heightened demand and awareness of these markets by the global investor community.

•   We believe that China will continue to grow and be an essential element of a well-designed investment portfolio.

•   We believe that investors should have low-cost§, transparent tools to obtain exposure to Chinese equity and fixed income markets.

•   China’s capital markets have fully recovered from the COVID-19 pandemic and, despite near-term volatility due to concerns surrounding inflation and new regulations, we believe the further development of China’s capital markets offers a long-term value proposition.

•   We are dedicated to helping investors obtain more complete passive market exposures and more balanced investment portfolios.

§              Buying and selling shares of the KraneShares ETFs will result in brokerage commissions.

Thank you for investing with us.

Jonathan Krane, CEO

March 31, 2021

3

Management Discussion of Fund Performance (Unaudited)

KraneShares CICC China Leaders 100 Index ETF

The KraneShares CICC China Leaders 100 Index ETF (the ‘‘Fund’’) seeks to provide investment results that, before fees and expenses, correspond generally to the price and yield performance of the CSI CICC Select 100 Index (the ‘‘Underlying Index’’).

The Underlying Index takes a smart-beta1 approach to systematically investing in companies listed in Mainland China. The strategy is based on China International Capital Corporation (“CICC”)’s latest research on China’s capital markets. This quantitative approach reflects CICC’s top down and bottom up research process, seeking to deliver the 100 leading companies in Mainland China.

China review

Global equity markets continued their upward trend in the second half of 2020, powered by growth and technology stocks as pandemic-induced trends favorable to the internet sector persisted worldwide. In 2021, vaccine availability turbocharged a global economic recovery, leading to a cyclical/value rotation that placed considerable pressure on growth stocks. This downside pressure was compounded by the March wind-down of leveraged bets. Meanwhile, the yield on the 10-Year US Treasury bond increased by nearly 0.75% in the first three months of 2021 from 0.92% to 1.64% despite no action from the US Federal Reserve (the Fed), accompanied by a rise in inflation in the United States. Growth and technology stocks in China followed a similar trajectory, reaching all-time highs before falling significantly. However, rates and inflation in China did not follow the US. This is a consequence of both China’s monetary response to the pandemic, which was more tactical, and China’s economy having recovered from the pandemic before the end of 2020, meaning that China experienced the inflationary effect of recovery earlier. Equity markets in the US, Europe, and China have pulled back from levels seen at the end of 2020 and beginning of 2021, though remain above pre-pandemic levels.

Mainland Chinese equities followed global equities higher in the second half of 2020 and lower in the first quarter of 2021 accompanied by inflation concerns and an increase in volatility. A strong economy that fully recovered from the global pandemic within the period led to gains in Mainland Chinese equities for the period. KFYP benefited from the barbell of strong performance of consumer staples and discretionary on one side, and financials, materials, and industrials on the other, all of which performed strongly within China A shares.

We see four key positive catalysts for China’s equity and bond markets in the year to come:

•   With the release of the 14th Five Year Plan (FYP), we now know that China’s government will continue to support “new economy” sectors such as internet services, electric vehicles, green energy and technology, and communication services. Consumer products could also see a boost from the government’s desire to upgrade the consumption habits of China’s population.

•   Foreign inflows into China’s Mainland equity market are outpacing MSCI inclusion, providing a potential long-term tailwind for the market.

•   Domestic participation in China’s Mainland equity market is also likely to increase over the next few years as domestic household assets move from real estate into equities, leading to a potential tailwind for the market. Real estate investment accounts for, on average, nearly 60% of Chinese household savings compared to 33% in the United States.

1       Smart beta is an investment style where a manager passively follows an index designed to take advantage of perceived systematic biases or inefficiencies in the market.

4

 

Management Discussion of Fund Performance (Unaudited) (continued)

KraneShares CICC China Leaders 100 Index ETF (continued)

•   Although the yield differential between China and the United States has narrowed over the past year, China’s 10-year government bond still offers a nearly 150 basis-point yield pickup over the 10-Year US Treasury.

China capital market overview (April 1, 2020 to March 31, 2021)

•   China’s equity market, as measured by the MSCI China All Shares Index, was up for the period, returning +45.82%, while China’s currency, the renminbi (RMB) appreciated 7.5% against the US dollar.

•   The best performing sectors across China’s equity markets included Consumer Discretionary (+100.11%), Information Technology (+71.16%), and Consumer Staples (+64.25%).

•   The worst performing sectors across China’s equity markets were Real Estate (+15.12%), Financials (+20.16%), and Utilities (+32.24%).

By the Fund’s fiscal year end on March 31, 2021 (the “reporting period”), the NAV of the Fund increased by 28.90%, while the Underlying Index increased by 32.82%.

At the end of the reporting period, the Fund held 25.75% of the portfolio in the Consumer Discretionary sector and 18.91% in the Industrials sector.

5

Management Discussion of Fund Performance (Unaudited) (continued)

KraneShares CICC China Leaders 100 Index ETF (continued)

Growth of a $10,000 Investment‡

(at Net Asset Value)‡

AVERAGE TOTAL RETURN FOR THE PERIOD ENDED MARCH 31, 2021*

 

One Year
Return

 

Three Year
Return

 

Five Year
Return

 

Annualized
Inception to Date

   

Net Asset
Value

 

Market
Price^

 

Net Asset
Value

 

Market
Price^

 

Net Asset
Value

 

Market
Price^

 

Net Asset
Value

 

Market
Price^

KraneShares CICC China Leaders 100 Index ETF

 

28.90

%

 

32.62

%‡

 

4.68

%‡

 

5.61

%‡

 

11.88

%‡

 

13.08

%‡

 

10.69

%‡

 

10.87

%‡

Hybrid KFYP Index (Net)**

 

N/A

 

 

32.82

%‡

 

N/A

 

 

6.06

%‡

 

N/A

 

 

11.85

%‡

 

N/A

 

 

10.84

%‡

S&P 500 Index

 

N/A

 

 

56.35

%‡

 

N/A

 

 

16.78

%‡

 

N/A

 

 

16.29

%‡

 

N/A

 

 

13.97

%‡

*       The Fund commenced operations on July 22, 2013.

**     The Hybrid KFYP Index (Net) consists of the CSI China Overseas Five Year Plan Index from the inception of the Fund through May 31, 2016, the Zacks New China Index from June 1, 2016 through November 1, 2018, and the CSI CICC Select 100 Index going forward. From June 1, 2016 to November 1, 2018, the Fund sought to provide investment results that, before fees and expenses, corresponded generally to the price and yield performance of the Zacks New China Index. Prior to June 1, 2016, the Fund was known as the KraneShares CSI New China ETF and sought to provide investment results that, before fees and expenses, corresponded generally to the price and yield performance of the CSI Overseas China Five-Year Plan Index. Hybrid KFYP Index (Net) Reflects reinvested dividends net of withholding taxes, but reflects no deduction for fees, expenses, or other taxes.

‡      Unaudited.

^      Beginning December 23, 2020, market price returns are based on the official closing price of an ETF share or, if the official closing price isn’t available, the midpoint between the national best bid and national best offer (“NBBO”) as of the time the ETF calculates current NAV per share. Prior to that date, market price returns were based on the midpoint between the Bid and Ask price. NAVs are calculated using prices as of 4:00 PM Eastern Time.

6

 

Management Discussion of Fund Performance (Unaudited) (continued)

KraneShares CICC China Leaders 100 Index ETF (concluded)

The performance data quoted herein represents past performance and the return and value of an investment in the Fund will fluctuate so that, when redeemed, may be worth less than its original cost. Current performance may be lower or higher than the performance data quoted. Past performance is no guarantee of future performance and should not be considered as a representation of the future results of the Fund. For performance data current to the most recent month end, please call 855-857-2638 or visit www.kraneshares.com. The Fund’s performance assumes the reinvestment of all dividends and all capital gains. Index returns assume reinvestment of dividends and, unlike a Fund’s returns, do not reflect any fees or expenses. If such fees and expenses were included in the index returns, the performance would have been lower. As stated in the Fund’s prospectus, the Fund’s operating expense ratio is 0.69%. Please note that one cannot invest directly in an unmanaged index. There are no assurances that the Fund will meet its stated objectives. The Fund’s holdings and allocations are subject to change and should not be considered recommendations to buy individual securities. For further information on the Fund’s objectives, risks, and strategies, see the Fund’s prospectus. Returns shown do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares.

7

Management Discussion of Fund Performance (Unaudited) (continued)

KraneShares CSI China Internet ETF

The KraneShares CSI China Internet ETF (the ‘‘Fund’’) seeks to provide investment results that, before fees and expenses, correspond generally to the price and yield performance of the CSI Overseas China Internet Index (the ‘‘Underlying Index’’).

The Underlying Index is designed to measure the performance of the investable universe of publicly traded China-based companies whose primary business or businesses are in the Internet and Internet-related sectors (‘‘China Internet Companies’’), as defined by the index sponsor, China Securities Index Co., Ltd. (‘‘CSI’’).

China Review

Global equity markets continued their upward trend in the second half of 2020, powered by growth and technology stocks as pandemic-induced trends favorable to the internet sector persisted worldwide. In 2021, vaccine availability turbocharged a global economic recovery, leading to a cyclical/value rotation that placed considerable pressure on growth stocks. This downside pressure was compounded by the March wind-down of leveraged bets. Meanwhile, the yield on the 10-Year US Treasury bond increased by nearly 0.75% in the first three months of 2021 from 0.92% to 1.64% despite no action from the US Federal Reserve (the Fed), accompanied by a rise in inflation in the United States. Growth and technology stocks in China followed a similar trajectory, reaching all-time highs before falling significantly. However, rates and inflation in China did not follow the US. This is a consequence of both China’s monetary response to the pandemic, which was more tactical, and China’s economy having recovered from the pandemic before the end of 2020, meaning that China experienced the inflationary effect of recovery earlier. Equity markets in the US, Europe, and China have pulled back from levels seen at the end of 2020 and beginning of 2021, though remain above pre-pandemic levels.

US and Hong Kong listed China internet equities enjoyed strong performance in the second half of 2020, though experienced a correction from historic highs in the first quarter of 2021 due to inflation concerns, reopening, a rotation into value/cyclical sectors, new regulations and the unwinding of leveraged bets. The strategy’s largest sector allocations, Communication Services and Consumer Discretionary, drove the Fund’s returns for the period.

We see four key positive catalysts for China’s equity and bond markets in the year to come:

•   With the release of the 14th Five Year Plan (FYP), we now know that China’s government will continue to support “new economy” sectors such as internet services, electric vehicles, green energy and technology, and communication services. Consumer products could also see a boost from the government’s desire to upgrade the consumption habits of China’s population.

•   Foreign inflows into China’s Mainland equity market are outpacing MSCI inclusion, providing a potential long-term tailwind for the market.

•   Domestic participation in China’s Mainland equity market is also likely to increase over the next few years as domestic household assets move from real estate into equities, leading to a potential tailwind for the market. Real estate investment accounts for, on average, nearly 60% of Chinese household savings compared to 33% in the United States.

•   Although the yield differential between China and the United States has narrowed over the past year, China’s 10-year government bond still offers a nearly 150 basis-point yield pickup over the 10-Year US Treasury.

8

 

Management Discussion of Fund Performance (Unaudited) (continued)

KraneShares CSI China Internet ETF (continued)

China capital market overview (April 1, 2020 to March 31, 2021)

•   China’s equity market, as measured by the MSCI China All Shares Index, was up for the period, returning +45.82%, while China’s currency, the renminbi (RMB) appreciated 7.5% against the US dollar.

•   The best performing sectors across China’s equity markets included Consumer Discretionary (+100.11%), Information Technology (+71.16%), and Consumer Staples (+64.25%).

•   The worst performing sectors across China’s equity markets were Real Estate (+15.12%), Financials (+20.16%), and Utilities (+32.24%).

By the Fund’s fiscal year end on March 31, 2021 (the “reporting period”), the NAV of the Fund increased by 67.77%, while the Underlying Index increased by 69.26%.

At the end of the reporting period, the Fund held 44.01% of the portfolio in the Consumer Discretionary sector and 36.76% in the Communication Services sector.

9

Management Discussion of Fund Performance (Unaudited) (continued)

KraneShares CSI China Internet ETF (continued)

Growth of a $10,000 Investment‡

(at Net Asset Value)‡

AVERAGE TOTAL RETURN FOR THE PERIOD ENDED MARCH 31, 2021*

 

One Year
Return

 

Three Year
Return

 

Five Year
Return

 

Annualized
Inception to Date

   

Net Asset
Value

 

Market
Price^

 

Net Asset
Value

 

Market
Price^

 

Net Asset
Value

 

Market
Price^

 

Net Asset
Value

 

Market
Price^

KraneShares CSI China Internet ETF

 

67.77

%

 

69.34

%‡

 

8.67

%‡

 

8.98

%‡

 

17.43

%‡

 

17.59

%‡

 

16.54

%‡

 

16.69

%‡

CSI Overseas China Internet Index

 

N/A

 

 

69.26

%‡

 

N/A

 

 

9.25

%‡

 

N/A

 

 

17.59

%‡

 

N/A

 

 

16.71

%‡

S&P 500 Index

 

N/A

 

 

56.35

%‡

 

N/A

 

 

16.78

%‡

 

N/A

 

 

16.29

%‡

 

N/A

 

 

14.10

%‡

*       The Fund commenced operations on July 31, 2013.

‡      Unaudited.

^      Beginning December 23, 2020, market price returns are based on the official closing price of an ETF share or, if the official closing price isn’t available, the midpoint between the national best bid and national best offer (“NBBO”) as of the time the ETF calculates current NAV per share. Prior to that date, market price returns were based on the midpoint between the Bid and Ask price. NAVs are calculated using prices as of 4:00 PM Eastern Time.

The performance data quoted herein represents past performance and the return and value of an investment in the Fund will fluctuate so that, when redeemed, may be worth less than its original cost. Current performance may be lower or higher than the performance data quoted. Past performance is no guarantee of future performance and should not be considered as a representation of the future results of the Fund. For performance data current to the most recent month end, please call 855-857-2638 or visit www.kraneshares.com. The Fund’s performance assumes the reinvestment of all dividends and all capital gains. Index returns assume reinvestment of dividends and, unlike a Fund’s returns, do not reflect any fees or expenses. If such fees and expenses were included in the index returns, the performance would have been lower. As stated in the Fund’s prospectus, the Fund’s operating expense ratio is 0.73%. Please note that one cannot invest directly in an unmanaged

10

 

Management Discussion of Fund Performance (Unaudited) (continued)

KraneShares CSI China Internet ETF (concluded)

index. There are no assurances that the Fund will meet its stated objectives. The Fund’s holdings and allocations are subject to change and should not be considered recommendations to buy individual securities. For further information on the Fund’s objectives, risks, and strategies, see the Fund’s prospectus. Returns shown do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares.

11

Management Discussion of Fund Performance (Unaudited) (continued)

KraneShares Bosera MSCI China A Share ETF

The KraneShares Bosera MSCI China A Share ETF (the ‘‘Fund’’) seeks to provide investment results that, before fees and expenses, correspond to the price and yield performance of the MSCI China A Index (the ‘‘Underlying Index’’).

The Underlying Index is designed to track the progressive partial inclusion of A shares in the MSCI Emerging Markets Index over time. The index is designed for global investors accessing the A shares market using the Stock Connect framework and is calculated using China A Stock Connect listings based on the offshore renminbi (“RMB”) exchange rate (CNH).

China Review

Global equity markets continued their upward trend in the second half of 2020, powered by growth and technology stocks as pandemic-induced trends favorable to the internet sector persisted worldwide. In 2021, vaccine availability turbocharged a global economic recovery, leading to a cyclical/value rotation that placed considerable pressure on growth stocks. This downside pressure was compounded by the March wind-down of leveraged bets. Meanwhile, the yield on the 10-Year US Treasury bond increased by nearly 0.75% in the first three months of 2021 from 0.92% to 1.64% despite no action from the US Federal Reserve (the Fed), accompanied by a rise in inflation in the United States. Growth and technology stocks in China followed a similar trajectory, reaching all-time highs before falling significantly. However, rates and inflation in China did not follow the US. This is a consequence of both China’s monetary response to the pandemic, which was more tactical, and China’s economy having recovered from the pandemic before the end of 2020, meaning that China experienced the inflationary effect of recovery earlier. Equity markets in the US, Europe, and China have pulled back from levels seen at the end of 2020 and beginning of 2021, though remain above pre-pandemic levels.

Mainland Chinese equities followed global equities higher in the second half of 2020 and lower in the first quarter of 2021 accompanied by inflation concerns and a surge in volatility. A strong economy that fully recovered from the global pandemic within the period led to gains in Mainland Chinese equities for the period. China’s exports surged nearly 40% year-over-year in the first quarter of 2021 as global economies began to reopen, which helped power aggregate demand in China’s economy. While 2020’s performance was characterized by the work from home and shelter-in-place trade, late 2020 and early 2021 saw a comeback in consumer staples, which now represent the second largest sector held in the portfolio and was the largest contributor to the Fund’s performance for the period. The Fund was also strongly supported by the strength of Financials, Industrials and Health Care.

We see four key positive catalysts for China’s equity and bond markets in the year to come:

•   With the release of the 14th Five Year Plan (FYP), we now know that China’s government will continue to support “new economy” sectors such as internet services, electric vehicles, green energy and technology, and communication services. Consumer products could also see a boost from the government’s desire to upgrade the consumption habits of China’s population.

•   Foreign inflows into China’s Mainland equity market are outpacing MSCI inclusion, providing a potential long-term tailwind for the market.

•   Domestic participation in China’s Mainland equity market is also likely to increase over the next few years as domestic household assets move from real estate into equities, leading to a potential tailwind for the market. Real estate investment accounts for, on average, nearly 60% of Chinese household savings compared to 33% in the United States.

12

 

Management Discussion of Fund Performance (Unaudited) (continued)

KraneShares Bosera MSCI China A Share ETF (continued)

•   Although the yield differential between China and the United States has narrowed over the past year, China’s 10-year government bond still offers a nearly 150 basis-point yield pickup over the 10-Year US Treasury.

China capital market overview (April 1, 2020 to March 31, 2021)

•   China’s equity market, as measured by the MSCI China All Shares Index, was up for the period, returning +45.82%, while China’s currency, the renminbi (RMB) appreciated 7.5% against the US dollar.

•   The best performing sectors across China’s equity markets included Consumer Discretionary (+100.11%), Information Technology (+71.16%), and Consumer Staples (+64.25%).

•   The worst performing sectors across China’s equity markets were Real Estate (+15.12%), Financials (+20.16%), and Utilities (+32.24%).

By the Fund’s fiscal year end on March 31, 2021 (the “reporting period”), the NAV of the Fund increased by 50.00%, while the Underlying Index increased by 51.10%.

At the end of the reporting period, the Fund held 22.11% of the portfolio in the Financials sector and 19.29% in the Consumer Staples sector.

13

Management Discussion of Fund Performance (Unaudited) (continued)

KraneShares Bosera MSCI China A Share ETF (continued)

Growth of a $10,000 Investment‡

(at Net Asset Value)‡

AVERAGE TOTAL RETURN FOR THE PERIOD ENDED MARCH 31, 2021*

 

One Year
Return

 

Three Year
Return

 

Five Year
Return

 

Annualized
Inception to Date

   

Net Asset
Value

 

Market
Price^

 

Net Asset
Value

 

Market
Price^

 

Net Asset
Value

 

Market
Price^

 

Net Asset
Value

 

Market
Price^

KraneShares Bosera MSCI China A Share ETF

 

50.00

%

 

51.23

%‡

 

10.62

%‡

 

10.37

%‡

 

10.22

%‡

 

10.44

%‡

 

11.19

%‡

 

11.32

%‡

Hybrid KBA Index (Net)**

 

N/A

 

 

51.10

%‡

 

N/A

 

 

10.52

%‡

 

N/A

 

 

10.06

%‡

 

N/A

 

 

12.30

%‡

S&P 500 Index

 

N/A

 

 

56.35

%‡

 

N/A

 

 

16.78

%‡

 

N/A

 

 

16.29

%‡

 

N/A

 

 

13.44

%‡

*       The Fund commenced operations on March 4, 2014.

**     The Hybrid KBA Index consists of the MSCI China A Index from the inception of the Fund through October 23, 2014, the MSCI China A International Index from October 23, 2014 through December 26, 2017, the MSCI China A Inclusion Index from December 26, 2017 to May 29, 2019, and the MSCI China A Index going forward. From October 23, 2014 through December 26, 2017, the Fund sought investment results that, before fees and expenses, corresponded to the price and yield performance of the MSCI China A International Index. Prior to October 23, 2014, the Fund sought investment results that, before fees and expenses, corresponded to the price and yield performance of the MSCI China A Index.

‡      Unaudited.

^      Beginning December 23, 2020, market price returns are based on the official closing price of an ETF share or, if the official closing price isn’t available, the midpoint between the national best bid and national best offer (“NBBO”) as of the time the ETF calculates current NAV per share. Prior to that date, market price returns were based on the midpoint between the Bid and Ask price. NAVs are calculated using prices as of 4:00 PM Eastern Time.

The performance data quoted herein represents past performance and the return and value of an investment in the Fund will fluctuate so that, when redeemed, may be worth less than its original cost. Current performance may be lower or higher than the performance data quoted. Past performance is no guarantee of future performance and should not be considered as a representation of the

14

 

Management Discussion of Fund Performance (Unaudited) (continued)

KraneShares Bosera MSCI China A Share ETF (concluded)

future results of the Fund. For performance data current to the most recent month end, please call 855-857-2638 or visit www.kraneshares.com. The Fund’s performance assumes the reinvestment of all dividends and all capital gains. Index returns assume reinvestment of dividends and, unlike a Fund’s returns, do not reflect any fees or expenses. If such fees and expenses were included in the index returns, the performance would have been lower. As stated in the Fund’s prospectus, as supplemented, the Fund’s gross operating expense ratio is 0.79% and its net expense ratio is 0.59% due to a Fee Waiver whereby the Fund’s investment manager, Krane Funds Advisors, LLC, has contractually agreed to reduce its management fee by 0.20% of the Fund’s average daily net assets until August 1, 2021. Please note that one cannot invest directly in an unmanaged index. There are no assurances that the Fund will meet its stated objectives. The Fund’s holdings and allocations are subject to change and should not be considered recommendations to buy individual securities. For further information on the Fund’s objectives, risks, and strategies, see the Fund’s prospectus. Returns shown do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares.

15

Management Discussion of Fund Performance (Unaudited) (continued)

KraneShares E Fund China Commercial Paper ETF

The KraneShares E Fund China Commercial Paper ETF (the ‘‘Fund’’) seeks to provide investment results that, before fees and expenses, correspond to the price and yield performance of the CSI Diversified High Grade Commercial Paper Index (the ‘‘Underlying Index’’).

The Underlying Index seeks to track the performance of high-grade on-shore renminbi (“RMB”)-denominated (or “CNY”) commercial paper that is issued by corporate issuers in the People’s Republic of China’s (“China” or the “PRC”) and traded in the Chinese Inter-bank Bond Market (“CIBM”). For purposes of the Underlying Index, high-grade commercial paper is commercial paper that is issued by an issuer whose long-term bonds are rated AAA or equivalent by a Chinese credit rating agency; or commercial paper that is rated at least A-1 or equivalent by a Chinese credit rating agency and is issued by an issuer whose long-term bonds are rated at least AA+ or equivalent by a Chinese credit rating agency. All constituents in the Underlying Index are unsecured bonds. To qualify for inclusion in the Underlying Index, commercial paper issue must have at least RMB 600 million outstanding and a remaining term to final maturity of no more than one year (365 days) and no less than one month.

China Review

Global equity markets continued their upward trend in the second half of 2020, powered by growth and technology stocks as pandemic-induced trends favorable to the internet sector persisted worldwide. In 2021, vaccine availability turbocharged a global economic recovery, leading to a cyclical/value rotation that placed considerable pressure on growth stocks. This downside pressure was compounded by the March wind-down of leveraged bets. Meanwhile, the yield on the 10-Year US Treasury bond increased by nearly 0.75% in the first three months of 2021 from 0.92% to 1.64% despite no action from the US Federal Reserve (the Fed), accompanied by a rise in inflation in the United States. Growth and technology stocks in China followed a similar trajectory, reaching all-time highs before falling significantly. However, rates and inflation in China did not follow the US. This is a consequence of both China’s monetary response to the pandemic, which was more tactical, and China’s economy having recovered from the pandemic before the end of 2020, meaning that China experienced the inflationary effect of recovery earlier. Equity markets in the US, Europe, and China have pulled back from levels seen at the end of 2020 and beginning of 2021, though remain above pre-pandemic levels.

China commercial paper was a source of stability for the global bond market during the global pandemic. Following the resumption of normal economic activity in China early in the reporting period, the Fund saw strong performance. The 7.5% appreciation in the Renminbi against the US dollar during the period also contributed to the Fund’s positive performance for the period.

We see four key positive catalysts for China’s equity and bond markets in the year to come:

•   With the release of the 14th Five Year Plan (FYP), we now know that China’s government will continue to support “new economy” sectors such as internet services, electric vehicles, green energy and technology, and communication services. Consumer products could also see a boost from the government’s desire to upgrade the consumption habits of China’s population.

•   Foreign inflows into China’s Mainland equity market are outpacing MSCI inclusion, providing a potential long-term tailwind for the market.

16

 

Management Discussion of Fund Performance (Unaudited) (continued)

KraneShares E Fund China Commercial Paper ETF (continued)

•   Domestic participation in China’s Mainland equity market is also likely to increase over the next few years as domestic household assets move from real estate into equities, leading to a potential tailwind for the market. Real estate investment accounts for, on average, nearly 60% of Chinese household savings compared to 33% in the United States.

•   Although the yield differential between China and the United States has narrowed over the past year, China’s 10-year government bond still offers a nearly 150 basis-point yield pickup over the 10-Year US Treasury.

China capital market overview (April 1, 2020 to March 31, 2021)

•   China’s equity market, as measured by the MSCI China All Shares Index, was up for the period, returning +45.82%, while China’s currency, the renminbi (RMB) appreciated 7.5% against the US dollar.

By the Fund’s fiscal year end on March 31, 2021 (the “reporting period”), the NAV of the Fund increased by 9.91%, while the Underlying Index increased by 10.72%.

At the end of the reporting period, the Fund held 100.00% of the portfolio in cash.

17

Management Discussion of Fund Performance (Unaudited) (continued)

KraneShares E Fund China Commercial Paper ETF (continued)

Growth of a $10,000 Investment‡

(at Net Asset Value)‡

AVERAGE TOTAL RETURN FOR THE PERIOD ENDED MARCH 31, 2021*

 

One Year
Return

 

Three Year
Return

 

Five Year
Return

 

Annualized
Inception to Date

   

Net Asset
Value

 

Market
Price^

 

Net Asset
Value

 

Market
Price^

 

Net Asset
Value

 

Market
Price^

 

Net Asset
Value

 

Market
Price^

KraneShares E Fund China Commercial Paper ETF

 

9.91

%

 

10.56

%‡

 

1.38

%‡

 

1.46

%‡

 

2.59

%‡

 

2.59

%‡

 

1.87

%‡

 

1.85

%‡

CSI Diversified High Grade Commercial Paper Index

 

N/A

 

 

10.72

%‡

 

N/A

 

 

1.78

%‡

 

N/A

 

 

3.12

%‡

 

N/A

 

 

2.59

%‡

S&P U.S. Treasury Bill 3-6 Month Index**

 

N/A

 

 

0.15

%‡

 

N/A

 

 

1.63

%‡

 

N/A

 

 

1.29

%‡

 

N/A

 

 

1.06

%‡

S&P 500 Index

 

N/A

 

 

56.35

%‡

 

N/A

 

 

16.78

%‡

 

N/A

 

 

16.29

%‡

 

N/A

 

 

13.11

%‡

*       The Fund commenced operations on December 2, 2014.

**     Index added to provide a fixed income benchmark for fixed income funds.

‡      Unaudited.

^      Beginning December 23, 2020, market price returns are based on the official closing price of an ETF share or, if the official closing price isn’t available, the midpoint between the national best bid and national best offer (“NBBO”) as of the time the ETF calculates current NAV per share. Prior to that date, market price returns were based on the midpoint between the Bid and Ask price. NAVs are calculated using prices as of 4:00 PM Eastern Time.

The performance data quoted herein represents past performance and the return and value of an investment in the Fund will fluctuate so that, when redeemed, may be worth less than its original cost. Current performance may be lower or higher than the performance data quoted. Past performance is no guarantee of future performance and should not be considered as a representation of the future results of the Fund. For performance data current to the most recent month end, please call 855-857-2638 or visit www.kraneshares.com. The Fund’s performance assumes the reinvestment

18

 

Management Discussion of Fund Performance (Unaudited) (continued)

KraneShares E Fund China Commercial Paper ETF (concluded)

of all dividends and all capital gains. Index returns assume reinvestment of dividends and, unlike a Fund’s returns, do not reflect any fees or expenses. If such fees and expenses were included in the index returns, the performance would have been lower. As stated in the Fund’s prospectus, the Fund’s gross operating expense ratio is 0.70% and its net expense ratio is 0.58% due to a Fee Waiver Agreement whereby the Fund’s investment manager, Krane Funds Advisors, LLC, has contractually agreed to reduce its management fee by 0.12% of the Fund’s average daily net assets until August 1, 2021. Please note that one cannot invest directly in an unmanaged index. There are no assurances that the Fund will meet its stated objectives. The Fund’s holdings and allocations are subject to change and should not be considered recommendations to buy individual securities. For further information on the Fund’s objectives, risks, and strategies, see the Fund’s prospectus. Returns shown do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares.

19

Management Discussion of Fund Performance (Unaudited) (continued)

KraneShares MSCI All China Index ETF

The KraneShares MSCI All China Index ETF (the “Fund”) seeks to provide investment results that, before fees and expenses, correspond to the price and yield performance of a specific foreign equity securities index. The Fund’s current index is the MSCI China All Shares Index (the “Underlying Index”).

The Underlying Index seeks to track the equity market performance of companies based in China and listed in Mainland China, Hong Kong, and the United States. Companies available for inclusion must be headquartered in China and meet the market capitalization minimums required by the MSCI Global Investable Market Indexes Methodology.

China Review

Global equity markets continued their upward trend in the second half of 2020, powered by growth and technology stocks as pandemic-induced trends favorable to the internet sector persisted worldwide. In 2021, vaccine availability turbocharged a global economic recovery, leading to a cyclical/value rotation that placed considerable pressure on growth stocks. This downside pressure was compounded by the March wind-down of leveraged bets. Meanwhile, the yield on the 10-Year US Treasury bond increased by nearly 0.75% in the first three months of 2021 from 0.92% to 1.64% despite no action from the US Federal Reserve (the Fed), accompanied by a rise in inflation in the United States. Growth and technology stocks in China followed a similar trajectory, reaching all-time highs before falling significantly. However, rates and inflation in China did not follow the US. This is a consequence of both China’s monetary response to the pandemic, which was more tactical, and China’s economy having recovered from the pandemic before the end of 2020, meaning that China experienced the inflationary effect of recovery earlier. Equity markets in the US, Europe, and China have pulled back from levels seen at the end of 2020 and beginning of 2021, though remain above pre-pandemic levels.

China equities across all listing venues followed global equities higher in the second half of 2020 and lower in the first quarter of 2021 accompanied by inflation concerns and an increase in volatility. A strong economy that fully recovered from the global pandemic within the period led to gains in many equities whose revenues are primarily sourced from Mainland China. China’s exports surged nearly 40% year-over-year in the first quarter of 2021 as global economies began to reopen, which helped power aggregate demand in China’s economy. Mainland listed Chinese A shares contributed the most to performance, followed by US listed shares and then Hong Kong listed shares.

We see four key positive catalysts for China’s equity and bond markets in the year to come:

•   With the release of the 14th Five Year Plan (FYP), we now know that China’s government will continue to support “new economy” sectors such as internet services, electric vehicles, green energy and technology, and communication services. Consumer products could also see a boost from the government’s desire to upgrade the consumption habits of China’s population.

•   Foreign inflows into China’s Mainland equity market are outpacing MSCI inclusion, providing a potential long-term tailwind for the market.

•   Domestic participation in China’s Mainland equity market is also likely to increase over the next few years as domestic household assets move from real estate into equities, leading to a potential tailwind for the market. Real estate investment accounts for, on average, nearly 60% of Chinese household savings compared to 33% in the United States.

20

 

Management Discussion of Fund Performance (Unaudited) (continued)

KraneShares MSCI All China Index ETF (continued)

•   Although the yield differential between China and the United States has narrowed over the past year, China’s 10-year government bond still offers a nearly 150 basis-point yield pickup over the 10-Year US Treasury.

China capital market overview (April 1, 2020 to March 31, 2021)

•   China’s equity market, as measured by the MSCI China All Shares Index, was up for the period, returning +45.82%, while China’s currency, the renminbi (RMB) appreciated 7.5% against the US dollar.

•   The best performing sectors across China’s equity markets included Consumer Discretionary (+100.11%), Information Technology (+71.16%), and Consumer Staples (+64.25%).

•   The worst performing sectors across China’s equity markets were Real Estate (+15.12%), Financials (+20.16%), and Utilities (+32.24%).

By the Fund’s fiscal year end on March 31, 2021 (the “reporting period”), the NAV of the Fund increased by 47.97%, while the Underlying Index increased by 45.82%.

At the end of the reporting period, the Fund held 29.07% of the portfolio in the Consumer Discretionary sector and 19.36% in the Financials sector.

21

Management Discussion of Fund Performance (Unaudited) (continued)

KraneShares MSCI All China Index ETF (continued)

Growth of a $10,000 Investment‡

(at Net Asset Value)‡

AVERAGE TOTAL RETURN FOR THE PERIOD ENDED MARCH 31, 2021*

 

One Year
Return

 

Three Year
Return

 

Five Year
Return

 

Annualized
Inception to Date

   

Net Asset
Value

 

Market
Price^

 

Net Asset
Value

 

Market
Price^

 

Net Asset
Value

 

Market
Price^

 

Net Asset
Value

 

Market
Price^

KraneShares MSCI All China Index ETF

 

47.97

%

 

49.77

%‡

 

10.18

%‡

 

10.00

%‡

 

12.42

%‡

 

12.44

%‡

 

7.82

%‡

 

8.00

%‡

Hybrid KALL Index (Net)**

 

N/A

 

 

45.82

%‡

 

N/A

 

 

9.88

%‡

 

N/A

 

 

12.57

%‡

 

N/A

 

 

8.22

%‡

S&P 500 Index

 

N/A

 

 

56.35

%‡

 

N/A

 

 

16.78

%‡

 

N/A

 

 

16.29

%‡

 

N/A

 

 

13.28

%‡

*       The Fund commenced operations on February 12, 2015.

**     The Hybrid KALL Index (Net) consists of the FTSE Emerging incl. China Overseas non-R/QFII GDP Weighted Index from the inception of the Fund through July 31, 2018, and the MSCI China All Shares Index going forward. Prior to July 31, 2018, the Fund was known as the KraneShares FTSE Emerging Markets Plus ETF and sought to provide investment results that, before fees and expenses, corresponded generally to the price and yield performance of the FTSE Emerging incl. China Overseas non-R/QFII GDP Weighted Index.

‡      Unaudited.

^      Beginning December 23, 2020, market price returns are based on the official closing price of an ETF share or, if the official closing price isn’t available, the midpoint between the national best bid and national best offer (“NBBO”) as of the time the ETF calculates current NAV per share. Prior to that date, market price returns were based on the midpoint between the Bid and Ask price. NAVs are calculated using prices as of 4:00 PM Eastern Time.

The performance data quoted herein represents past performance and the return and value of an investment in the Fund will fluctuate so that, when redeemed, may be worth less than its original cost. Current performance may be lower or higher than the performance data quoted. Past performance is no guarantee of future performance and should not be considered as a representation of the future results of the Fund. For performance data current to the most recent month end, please call 855-857-2638 or visit www.kraneshares.com. The Fund’s performance assumes the reinvestment

22

 

Management Discussion of Fund Performance (Unaudited) (continued)

KraneShares MSCI All China Index ETF (concluded)

of all dividends and all capital gains. Index returns assume reinvestment of dividends and, unlike a Fund’s returns, do not reflect any fees or expenses. If such fees and expenses were included in the index returns, the performance would have been lower. As stated in the Fund’s prospectus, the Fund’s gross operating expense ratio is 0.69% and its net expense ratio is 0.49% due to an a Fee Waiver whereby the Fund’s investment manager, Krane Funds Advisors, LLC, has contractually agreed to reduce its management fee by 0.20% of the Fund’s average daily net assets until August 1, 2021. Please note that one cannot invest directly in an unmanaged index. There are no assurances that the Fund will meet its stated objectives. The Fund’s holdings and allocations are subject to change and should not be considered recommendations to buy individual securities. For further information on the Fund’s objectives, risks, and strategies, see the Fund’s prospectus. Returns shown do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares.

23

Management Discussion of Fund Performance (Unaudited) (continued)

KraneShares MSCI One Belt One Road Index ETF

The KraneShares MSCI One Belt One Road Index ETF (the “Fund”) seeks to provide investment results that, before fees and expenses, track the price and yield performance of the MSCI Global China Infrastructure Exposure Index (the “Underlying Index”).

The Underlying Index aims to identify potential beneficiaries of the One Belt One Road (“OBOR”) initiative based on how their geography, revenue, and sector attributes align with the broad theme. OBOR seeks to capture the economic growth and monetize the potential upside for the companies involved in China’s One Belt One Road initiative.

Global/Emerging Markets Review

Global equity markets continued their upward trend in the second half of 2020, powered by growth and technology stocks as pandemic-induced trends favorable to the internet sector persisted worldwide. In 2021, vaccine availability turbocharged a global economic recovery, leading to a cyclical/value rotation that placed considerable pressure on growth stocks. This downside pressure was compounded by the March wind-down of leveraged bets. Meanwhile, the yield on the 10-Year US Treasury bond increased by nearly 0.75% in the first three months of 2021 from 0.92% to 1.64% despite no action from the US Federal Reserve (the Fed), accompanied by a rise in inflation in the United States. Growth and technology stocks in China followed a similar trajectory, reaching all-time highs before falling significantly. However, rates and inflation in China did not follow the US. This is a consequence of both China’s monetary response to the pandemic, which was more tactical, and China’s having recovered from the pandemic before the end of 2020, meaning that China experienced the inflationary effect of recovery earlier. Equity markets in the US, Europe, and China have pulled back from levels seen at the end of 2020 and beginning of 2021, though remain above pre-pandemic levels.

Global companies poised to benefit from China’s One Belt One Road Initiative (also known as the Belt & Road Initiative) rebounded strongly from their lows during the coronavirus pandemic. Most projects under the initiative have now resumed work following pandemic-induced disruptions. Metals and mining companies made the largest contribution to the Fund’s performance during the period as metals prices rose sharply in the first quarter of 2021.

We see three key positive catalysts for Emerging Markets equities in the year to come:

•   Vaccine distribution may improve in Emerging economies following the US decision to waive patent restrictions on vaccines globally and is the key to a full recovery in emerging economies.

•   The normalization of commodity prices and their meteoric rise in 2021 is likely to benefit commodities exporting countries such as Indonesia, Chile, and Argentina.

•   The COVID-19 pandemic turbocharged the adoption of E-Commerce across emerging economies. We believe E-Commerce companies in Emerging Markets such as Mercado Libre are likely to retain users and continue to grow revenues as these economies continue to move online.

Emerging Markets Overview (April 1, 2020 to March 31, 2021)

•   Emerging Market equities, as measured by the MSCI Emerging Markets Index, were up for the period, returning +58.86%.

24

 

Management Discussion of Fund Performance (Unaudited) (continued)

KraneShares MSCI One Belt One Road Index ETF (continued)

•   The best performing sectors across the Emerging Market equity market included Information Technology (+103.94%), Materials (+96.45%), and Consumer Discretionary (+61.54%).

•   The worst performing sectors across the Emerging Market equity market included Real Estate (+20.20%), Utilities (+30.44%), and Consumer Staples (+34.12%).

By the Fund’s fiscal year end on March 31, 2021 (the “reporting period”), the NAV of the Fund increased by 65.82% while the Underlying Index increased by 67.58%.

At the end of the reporting period, the Fund held 33.84% of the portfolio in the Industrials sector and 33.52% in the Materials sector.

25

Management Discussion of Fund Performance (Unaudited) (continued)

KraneShares MSCI One Belt One Road Index ETF (continued)

Growth of a $10,000 Investment‡

(at Net Asset Value)‡

AVERAGE TOTAL RETURN FOR THE PERIOD ENDED MARCH 31, 2021*

 

One Year
Return

 

Three Year
Return

 

Annualized
Inception to Date

   

Net Asset
Value

 

Market
Price^

 

Net Asset
Value

 

Market
Price^

 

Net Asset
Value

 

Market
Price^

KraneShares MSCI One Belt One Road Index ETF

 

65.82

%

 

69.66

%‡

 

7.23

%‡

 

7.01

%‡

 

6.84

%‡

 

7.13

%‡

MSCI Global China Infrastructure Exposure Index (Net)

 

N/A

 

 

67.58

%‡

 

N/A

 

 

9.02

%‡

 

N/A

 

 

8.46

%‡

S&P 500 Index

 

N/A

 

 

56.35

%‡

 

N/A

 

 

16.78

%‡

 

N/A

 

 

16.51

%‡

*       The Fund commenced operations on September 7, 2017.

‡      Unaudited.

^      Beginning December 23, 2020, market price returns are based on the official closing price of an ETF share or, if the official closing price isn’t available, the midpoint between the national best bid and national best offer (“NBBO”) as of the time the ETF calculates current NAV per share. Prior to that date, market price returns were based on the midpoint between the Bid and Ask price. NAVs are calculated using prices as of 4:00 PM Eastern Time.

The performance data quoted herein represents past performance and the return and value of an investment in the Fund will fluctuate so that, when redeemed, may be worth less than its original cost. Current performance may be lower or higher than the performance data quoted. Past performance is no guarantee of future performance and should not be considered as a representation of the future results of the Fund. For performance data current to the most recent month end, please call 855-857-2638 or visit www.kraneshares.com. The Fund’s performance assumes the reinvestment of all dividends and all capital gains. Index returns assume reinvestment of dividends and, unlike a Fund’s returns, do not reflect any fees or expenses. If such fees and expenses were included in the index returns, the performance would have been lower. As stated in the Fund’s prospectus,

26

 

Management Discussion of Fund Performance (Unaudited) (continued)

KraneShares MSCI One Belt One Road Index ETF (concluded)

as supplemented, the Fund’s operating expense ratio is 0.80%. Please note that one cannot invest directly in an unmanaged index. There are no assurances that the Fund will meet its stated objectives. The Fund’s holdings and allocations are subject to change and should not be considered recommendations to buy individual securities. For further information on the Fund’s objectives, risks, and strategies, see the Fund’s prospectus. Returns shown do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares.

27

Management Discussion of Fund Performance (Unaudited) (continued)

KraneShares Emerging Markets Consumer Technology Index ETF

The KraneShares Emerging Markets Consumer Technology Index ETF (the “Fund”) seeks to provide investment results that, before fees and expenses, track the price and yield performance of the Solactive Emerging Markets Consumer Technology Index (the “Underlying Index”).

The Underlying Index selects companies from 26 eligible countries within emerging markets whose primary business or businesses are internet retail, internet software/services, purchase, payment processing, or software for internet and E-Commerce transactions.

Global/Emerging Markets Review

Global equity markets continued their upward trend in the second half of 2020, powered by growth and technology stocks as pandemic-induced trends favorable to the internet sector persisted worldwide. In 2021, vaccine availability turbocharged a global economic recovery, leading to a cyclical/value rotation that placed considerable pressure on growth stocks. This downside pressure was compounded by the March wind-down of leveraged bets. Meanwhile, the yield on the 10-Year US Treasury bond increased by nearly 0.75% in the first three months of 2021 from 0.92% to 1.64% despite no action from the US Federal Reserve (the Fed), accompanied by a rise in inflation in the United States. Growth and technology stocks in China followed a similar trajectory, reaching all-time highs before falling significantly. However, rates and inflation in China did not follow the US. This is a consequence of both China’s monetary response to the pandemic, which was more tactical, and China’s having recovered from the pandemic before the end of 2020, meaning that China experienced the inflationary effect of recovery earlier. Equity markets in the US, Europe, and China have pulled back from levels seen at the end of 2020 and beginning of 2021, though remain above pre-pandemic levels.

Consumer technology platforms all over the world saw tremendous expansion by all metrics during the pandemic and that expansion was reflected in their share prices. In the developing world, that momentum continued into 2021. However, emerging markets consumer technology equities followed global growth equities lower in the first quarter of 2021 amid inflation concerns, reopening, a rotation into value/cyclical sectors, and heightened volatility.

We see three key positive catalysts for Emerging Markets equities in the year to come:

•   Vaccine distribution may improve in Emerging economies following the US decision to waive patent restrictions on vaccines globally and is the key to a full recovery in emerging economies.

•   The normalization of commodity prices and their meteoric rise in 2021 is likely to benefit commodities exporting countries such as Indonesia, Chile, and Argentina.

•   The COVID-19 pandemic turbocharged the adoption of E-Commerce across emerging economies. We believe E-Commerce companies in Emerging Markets such as Mercado Libre are likely to retain users and continue to grow revenues as these economies continue to move online.

Emerging Markets Overview (April 1, 2020 to March 31, 2021)

•   Emerging Market equities, as measured by the MSCI Emerging Markets Index, were up for the period, returning +58.86%.

28

 

Management Discussion of Fund Performance (Unaudited) (continued)

KraneShares Emerging Markets Consumer Technology Index ETF (continued)

•   The best performing sectors across the Emerging Market equity market included Information Technology (+103.94%), Materials (+96.45%), and Consumer Discretionary (+61.54%).

•   The worst performing sectors across the Emerging Market equity market included Real Estate (+20.20%), Utilities (+30.44%), and Consumer Staples (+34.12%).

By the Fund’s fiscal year end on March 31, 2021 (the “reporting period”), the NAV of the Fund increased by 67.85%, while the Underlying Index increased by 69.26%.

At the end of the reporting period, the Fund held 42.87% of the portfolio in the Communication Services sector and 41.04% in the Consumer Discretionary sector.

29

Management Discussion of Fund Performance (Unaudited) (continued)

KraneShares Emerging Markets Consumer Technology Index ETF (continued)

Growth of a $10,000 Investment‡

(at Net Asset Value)‡

AVERAGE TOTAL RETURN FOR THE PERIOD ENDED MARCH 31, 2021*

 

One Year
Return

 

Three Year
Return

 

Annualized
Inception to Date

   

Net Asset
Value

 

Market
Price^

 

Net Asset
Value

 

Market
Price^

 

Net Asset
Value

 

Market
Price^

KraneShares Emerging Markets Consumer Technology Index ETF

 

67.85

%

 

67.94

%‡

 

8.03

%‡

 

7.81

%‡

 

8.69

%‡

 

8.81

%‡

Solactive Emerging Markets Consumer Technology Index

 

N/A

 

 

69.26

%‡

 

N/A

 

 

8.82

%‡

 

N/A

 

 

10.00

%‡

S&P 500 Index

 

N/A

 

 

56.35

%‡

 

N/A

 

 

16.78

%‡

 

N/A

 

 

15.73

%‡

*       The Fund commenced operations on October 11, 2017.

‡      Unaudited.

^      Beginning December 23, 2020, market price returns are based on the official closing price of an ETF share or, if the official closing price isn’t available, the midpoint between the national best bid and national best offer (“NBBO”) as of the time the ETF calculates current NAV per share. Prior to that date, market price returns were based on the midpoint between the Bid and Ask price. NAVs are calculated using prices as of 4:00 PM Eastern Time.

The performance data quoted herein represents past performance and the return and value of an investment in the Fund will fluctuate so that, when redeemed, may be worth less than its original cost. Current performance may be lower or higher than the performance data quoted. Past performance is no guarantee of future performance and should not be considered as a representation of the future results of the Fund. For performance data current to the most recent month end, please call 855-857-2638 or visit www.kraneshares.com. The Fund’s performance assumes the reinvestment of all dividends and all capital gains. Index returns assume reinvestment of dividends and, unlike a Fund’s returns, do not reflect any fees or expenses. If such fees and expenses were included in the index returns, the performance would have been lower. As stated in

30

 

Management Discussion of Fund Performance (Unaudited) (continued)

KraneShares Emerging Markets Consumer Technology Index ETF (concluded)

the Fund’s prospectus, the Fund’s gross operating expense ratio is 0.81% and its net expense ratio is 0.61% due to a Fee Waiver whereby the Fund’s investment manager, Krane Funds Advisors, LLC, has contractually agreed to reduce its management fee by 0.20% of the Fund’s average daily net assets until August 1, 2021.

Please note that one cannot invest directly in an unmanaged index. There are no assurances that the Fund will meet its stated objectives. The Fund’s holdings and allocations are subject to change and should not be considered recommendations to buy individual securities. For further information on the Fund’s objectives, risks, and strategies, see the Fund’s prospectus. Returns shown do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares.

31

Management Discussion of Fund Performance (Unaudited) (continued)

KraneShares MSCI China Clean Technology Index ETF

The KraneShares MSCI China Clean Technology Index ETF (the “Fund”) seeks to provide investment results that, before fees and expenses, correspond to the price and yield performance of a specific foreign equity securities the MSCI China IMI Environment 10/40 Index (the “Underlying Index”).

The Underlying Index is comprised of securities that derive at least 50% of their revenues from environmentally beneficial products and services. The Underlying Index is based on five key Clean Technology environmental themes: Alternative Energy, Sustainable Water, Green Building, Pollution Prevention and Energy Efficiency. The Underlying Index aims to serve as a benchmark for investors seeking exposure to Chinese companies that focus on contributing to a more environmentally sustainable economy by making efficient use of scarce natural resources or by mitigating the impact of environmental degradation. Constituent selection is based on data from MSCI Environment, Social, and Governance (ESG).

China review

Global equity markets continued their upward trend in the second half of 2020, powered by growth and technology stocks as pandemic-induced trends favorable to the internet sector persisted worldwide. In 2021, vaccine availability turbocharged a global economic recovery, leading to a cyclical/value rotation that placed considerable pressure on growth stocks. This downside pressure was compounded by the March wind-down of leveraged bets. Meanwhile, the yield on the 10-Year US Treasury bond increased by nearly 0.75% in the first three months of 2021 from 0.92% to 1.64% despite no action from the US Federal Reserve (the Fed), accompanied by a rise in inflation in the United States. Growth and technology stocks in China followed a similar trajectory, reaching all-time highs before falling significantly. However, rates and inflation in China did not follow the US. This is a consequence of both China’s monetary response to the pandemic, which was more tactical, and China’s economy having recovered from the pandemic before the end of 2020, meaning that China experienced the inflationary effect of recovery earlier. Equity markets in the US, Europe, and China have pulled back from levels seen at the end of 2020 and beginning of 2021, though remain above pre-pandemic levels.

China clean technology equities outperformed global equities significantly in the second half of 2020 though came off of historic highs in the first quarter of 2021 due to inflation concerns and heightened volatility. However, they nonetheless maintained significant outperformance versus broader benchmarks. The growth of electric vehicles companies led the way in clean technology and contributed substantially to the Fund’s performance for the period.

We see four key positive catalysts for China’s equity and bond markets in the year to come:

•   With the release of the 14th Five Year Plan (FYP), we now know that China’s government will continue to support “new economy” sectors such as internet services, electric vehicles, green energy and technology, and communication services. Consumer products could also see a boost from the government’s desire to upgrade the consumption habits of China’s population.

•   Foreign inflows into China’s Mainland equity market are outpacing MSCI inclusion, providing a potential long-term tailwind for the market.

32

 

Management Discussion of Fund Performance (Unaudited) (continued)

KraneShares MSCI China Clean Technology Index ETF (continued)

•   Domestic participation in China’s Mainland equity market is also likely to increase over the next few years as domestic household assets move from real estate into equities, leading to a potential tailwind for the market. Real estate investment accounts for, on average, nearly 60% of Chinese household savings compared to 33% in the United States.

•   Although the yield differential between China and the United States has narrowed over the past year, China’s 10-year government bond still offers a nearly 150 basis-point yield pickup over the 10-Year US Treasury.

China capital market overview (April 1, 2020 to March 31, 2021)

•   China’s equity market, as measured by the MSCI China All Shares Index, was up for the period, returning +45.82%, while China’s currency, the renminbi (RMB) appreciated 7.5% against the US dollar.

•   The best performing sectors across China’s equity markets included Consumer Discretionary (+100.11%), Information Technology (+71.16%), and Consumer Staples (+64.25%).

•   The worst performing sectors across China’s equity markets were Real Estate (+15.12%), Financials (+20.16%), and Utilities (+32.24%).

By the Fund’s fiscal year end on March 31, 2021 (the “reporting period”), the NAV of the Fund increased by 143.03%, while the Underlying Index increased by 133.24%.

At the end of the reporting period, the Fund held 28.38% of the portfolio in the Industrials sector and 26.37% in the Consumer Discretionary sector.

33

Management Discussion of Fund Performance (Unaudited) (continued)

KraneShares MSCI China Clean Technology Index ETF (continued)

Growth of a $10,000 Investment‡

(at Net Asset Value)‡

AVERAGE TOTAL RETURN FOR THE PERIOD ENDED MARCH 31, 2021*

 

One Year
Return

 

Three Year
Return

 

Annualized
Inception to Date

   

Net Asset
Value

 

Market
Price^

 

Net Asset
Value

 

Market
Price^

 

Net Asset
Value

 

Market
Price^

KraneShares MSCI China Clean Technology Index ETF

 

143.03

%

 

146.55

%‡

 

22.32

%‡

 

22.30

%‡

 

17.45

%‡

 

17.97

%‡

MSCI China IMI Environment 10/40 Index (Net)

 

N/A

 

 

133.24

%‡

 

N/A

 

 

21.03

%‡

 

N/A

 

 

16.46

%‡

S&P 500 Index

 

N/A

 

 

56.35

%‡

 

N/A

 

 

16.78

%‡

 

N/A

 

 

15.80

%‡

*       The Fund commenced operations on October 12, 2017.

‡      Unaudited.

^      Beginning December 23, 2020, market price returns are based on the official closing price of an ETF share or, if the official closing price isn’t available, the midpoint between the national best bid and national best offer (“NBBO”) as of the time the ETF calculates current NAV per share. Prior to that date, market price returns were based on the midpoint between the Bid and Ask price. NAVs are calculated using prices as of 4:00 PM Eastern Time.

The performance data quoted herein represents past performance and the return and value of an investment in the Fund will fluctuate so that, when redeemed, may be worth less than its original cost. Current performance may be lower or higher than the performance data quoted. Past performance is no guarantee of future performance and should not be considered as a representation of the future results of the Fund. For performance data current to the most recent month end, please call 855-857-2638 or visit www.kraneshares.com. The Fund’s performance assumes the reinvestment of all dividends and all capital gains. Index returns assume reinvestment of dividends and, unlike a Fund’s returns, do not reflect any fees or expenses. If such fees and expenses were included in the index returns, the performance would have been lower. As stated in the Fund’s prospectus, the Fund’s gross operating expense ratio is 0.79%. Please note that one cannot invest directly in an

34

 

Management Discussion of Fund Performance (Unaudited) (continued)

KraneShares MSCI China Clean Technology Index ETF (concluded)

unmanaged index. There are no assurances that the Fund will meet its stated objectives. The Fund’s holdings and allocations are subject to change and should not be considered recommendations to buy individual securities. For further information on the Fund’s objectives, risks, and strategies, see the Fund’s prospectus. Returns shown do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares.

35

Management Discussion of Fund Performance (Unaudited) (continued)

KraneShares Electric Vehicles and Future Mobility Index ETF

The KraneShares Electric Vehicles and Future Mobility Index ETF (the ‘‘Fund’’) seeks to provide investment results that, before fees and expenses, correspond to the price and yield performance of the Solactive Electric Vehicles and Future Mobility Index (the ‘‘Underlying Index’’).

The Underlying Index is designed to track the performance of companies engaged in the production of electric vehicles and/or their components, or engaged in other initiatives that may change the future of mobility. The Underlying Index includes issuers engaged in the electric vehicle production, autonomous driving, shared mobility, lithium and/or copper production, lithium-ion/lead acid batteries, hydrogen fuel cell manufacturing and/or electric infrastructure businesses.

Global/Emerging Markets Review

Global equity markets continued their upward trend in the second half of 2020, powered by growth and technology stocks as pandemic-induced trends favorable to the internet sector persisted worldwide. In 2021, vaccine availability turbocharged a global economic recovery, leading to a cyclical/value rotation that placed considerable pressure on growth stocks. This downside pressure was compounded by the March wind-down of leveraged bets. Meanwhile, the yield on the 10-Year US Treasury bond increased by nearly 0.75% in the first three months of 2021 from 0.92% to 1.64% despite no action from the US Federal Reserve (the Fed), accompanied by a rise in inflation in the United States. Growth and technology stocks in China followed a similar trajectory, reaching all-time highs before falling significantly. However, rates and inflation in China did not follow the US. This is a consequence of both China’s monetary response to the pandemic, which was more tactical, and China’s having recovered from the pandemic before the end of 2020, meaning that China experienced the inflationary effect of recovery earlier. Equity markets in the US, Europe, and China have pulled back from levels seen at the end of 2020 and beginning of 2021, though remain above pre-pandemic levels.

Despite the pandemic and a slumping global automotive industry, electric vehicle (EV) sales achieved 43% growth from 2019 to 2020, mostly due to strong adoption in Europe and China. For the first time in many years, Europe outpaced China in EV demand. Cost reduction, stricter emissions regulations, government incentives, and the rollout of new and affordable models are bringing EVs within reach of the mass consumer. Makers of cars and semiconductors made the greatest contributions to the Fund’s performance for the period.

We see three key positive catalysts for Emerging Markets equities in the year to come:

•   Vaccine distribution may improve in Emerging economies following the US decision to waive patent restrictions on vaccines globally and is the key to a full recovery in emerging economies.

•   The normalization of commodity prices and their meteoric rise in 2021 is likely to benefit commodities exporting countries such as Indonesia, Chile, and Argentina.

•   The COVID-19 pandemic turbocharged the adoption of E-Commerce across emerging economies. We believe E-Commerce companies in Emerging Markets such as Mercado Libre are likely to retain users and continue to grow revenues as these economies continue to move online.

36

 

Management Discussion of Fund Performance (Unaudited) (continued)

KraneShares Electric Vehicles and Future Mobility Index ETF (continued)

Emerging Markets Overview (April 1, 2020 to March 31, 2021)

•   Emerging Market equities, as measured by the MSCI Emerging Markets Index, were up for the period, returning +58.86%.

•   The best performing sectors across the Emerging Market equity market included Information Technology (+103.94%), Materials (+96.45%), and Consumer Discretionary (+61.54%).

•   The worst performing sectors across the Emerging Market equity market included Real Estate (+20.20%), Utilities (+30.44%), and Consumer Staples (+34.12%).

By the Fund’s fiscal year end on March 31, 2021 (the “reporting period”), the NAV of the Fund increased by 122.46%, while the Underlying Index increased by 124.89%.

At the end of the reporting period, the Fund held 39.23% of the portfolio in the Consumer Discretionary sector and 33.38% in the Information Technology sector.

37

Management Discussion of Fund Performance (Unaudited) (continued)

KraneShares Electric Vehicles and Future Mobility Index ETF (continued)

Growth of a $10,000 Investment‡

(at Net Asset Value)‡

AVERAGE TOTAL RETURN FOR THE PERIOD ENDED MARCH 31, 2021*

 

One Year
Return

 

Three Year
Return

 

Annualized
Inception to Date

   

Net Asset
Value

 

Market
Price^

 

Net Asset
Value

 

Market
Price^

 

Net Asset
Value

 

Market
Price^

KraneShares Electric Vehicles and Future Mobility Index ETF

 

122.46

%

 

125.40

%‡

 

23.31

%‡

 

22.95

%‡

 

19.05

%‡

 

19.16

%‡

Solactive Electric Vehicles and Future Mobility Index

 

N/A

 

 

124.89

%‡

 

N/A

 

 

23.67

%‡

 

N/A

 

 

19.25

%‡

S&P 500 Index

 

N/A

 

 

56.35

%‡

 

N/A

 

 

16.78

%‡

 

N/A

 

 

13.72

%‡

*       The Fund commenced operations on January 18, 2018.

‡      Unaudited.

^      Beginning December 23, 2020, market price returns are based on the official closing price of an ETF share or, if the official closing price isn’t available, the midpoint between the national best bid and national best offer (“NBBO”) as of the time the ETF calculates current NAV per share. Prior to that date, market price returns were based on the midpoint between the Bid and Ask price. NAVs are calculated using prices as of 4:00 PM Eastern Time.

The performance data quoted herein represents past performance and the return and value of an investment in the Fund will fluctuate so that, when redeemed, may be worth less than its original cost. Current performance may be lower or higher than the performance data quoted. Past performance is no guarantee of future performance and should not be considered as a representation of the future results of the Fund. For performance data current to the most recent month end, please call 855-857-2638 or visit www.kraneshares.com. The Fund’s performance assumes the reinvestment of all dividends and all capital gains. Index returns assume reinvestment of dividends and, unlike a Fund’s returns, do not reflect any fees or expenses. If such fees and expenses were included in the index returns, the performance would have been lower. As stated in

38

 

Management Discussion of Fund Performance (Unaudited) (continued)

KraneShares Electric Vehicles and Future Mobility Index ETF (concluded)

the Fund’s prospectus, the Fund’s operating expense ratio is 0.72%. Please note that one cannot invest directly in an unmanaged index. There are no assurances that the Fund will meet its stated objectives. The Fund’s holdings and allocations are subject to change and should not be considered recommendations to buy individual securities. For further information on the Fund’s objectives, risks, and strategies, see the Fund’s prospectus. Returns shown do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares.

39

Management Discussion of Fund Performance (Unaudited) (continued)

KraneShares MSCI All China Health Care Index ETF

The KraneShares MSCI All China Health Care Index ETF (the “Fund”) seeks to provide investment results that, before fees and expenses, track the price and yield performance of a specific foreign equity securities index. The Fund’s current index is the MSCI China All Shares Health Care 10/40 Index (the “Underlying Index”).

The Underlying Index is a free float adjusted market capitalization weighted index designed to track the equity market performance of Chinese companies engaged in the health care sector. The securities in the Index include all types of publicly issued shares of Chinese issuers, which are listed in Mainland China, Hong Kong and United States. Issuers eligible for inclusion must be classified under the Global Industry Classification Standard as engaged in the healthcare sector. The issuers included in the Underlying Index may include small-cap, mid-cap and large-cap companies.

China Review

Global equity markets continued their upward trend in the second half of 2020, powered by growth and technology stocks as pandemic-induced trends favorable to the internet sector persisted worldwide. In 2021, vaccine availability turbocharged a global economic recovery, leading to a cyclical/value rotation that placed considerable pressure on growth stocks. This downside pressure was compounded by the March wind-down of leveraged bets. Meanwhile, the yield on the 10-Year US Treasury bond increased by nearly 0.75% in the first three months of 2021 from 0.92% to 1.64% despite no action from the US Federal Reserve (the Fed), accompanied by a rise in inflation in the United States. Growth and technology stocks in China followed a similar trajectory, reaching all-time highs before falling significantly. However, rates and inflation in China did not follow the US. This is a consequence of both China’s monetary response to the pandemic, which was more tactical, and China’s economy having recovered from the pandemic before the end of 2020, meaning that China experienced the inflationary effect of recovery earlier. Equity markets in the US, Europe, and China have pulled back from levels seen at the end of 2020 and beginning of 2021, though remain above pre-pandemic levels.

Health care was the second-best performing sector in China in 2020. Growth in China’s healthcare sector was broad as most sub-industries saw positive developments. Life sciences companies performed best in 2020 followed by medical devices, health care technology, and biotechnology. However, health care distribution companies’ operations were disrupted by the pandemic and struggled as a result. Meanwhile, the gulf between pharmaceutical companies with robust, innovative drug pipelines and those that remain dependent on generics widened.

We see four key positive catalysts for China’s equity and bond markets in the year to come:

•   With the release of the 14th Five Year Plan (FYP), we now know that China’s government will continue to support “new economy” sectors such as internet services, electric vehicles, green energy and technology, and communication services. Consumer products could also see a boost from the government’s desire to upgrade the consumption habits of China’s population.

•   Foreign inflows into China’s Mainland equity market are outpacing MSCI inclusion, providing a potential long-term tailwind for the market.

•   Domestic participation in China’s Mainland equity market is also likely to increase over the next few years as domestic household assets move from real estate into equities, leading to a potential tailwind for the market. Real estate investment accounts for, on average, nearly 60% of Chinese household savings compared to 33% in the United States.

40

 

Management Discussion of Fund Performance (Unaudited) (continued)

KraneShares MSCI All China Health Care Index ETF (continued)

•   Although the yield differential between China and the United States has narrowed over the past year, China’s 10-year government bond still offers a nearly 150 basis-point yield pickup over the 10-Year US Treasury.

China capital market overview (April 1, 2020 to March 31, 2021)

•   China’s equity market, as measured by the MSCI China All Shares Index, was up for the period, returning +45.82%, while China’s currency, the renminbi (RMB) appreciated 7.5% against the US dollar.

•   The best performing sectors across China’s equity markets included Consumer Discretionary (+100.11%), Information Technology (+71.16%), and Consumer Staples (+64.25%).

•   The worst performing sectors across China’s equity markets were Real Estate (+15.12%), Financials (+20.16%), and Utilities (+32.24%).

By the Fund’s fiscal year end on March 31, 2021 (the “reporting period”), the NAV of the Fund increased by 61.06%, while the Underlying Index increased 63.50%.

At the end of the reporting period, the Fund held 100% of the portfolio in the Health Care sector.

41

Management Discussion of Fund Performance (Unaudited) (continued)

KraneShares MSCI All China Health Care Index ETF (continued)

Growth of a $10,000 Investment‡

(at Net Asset Value)‡

AVERAGE TOTAL RETURN FOR THE PERIOD ENDED MARCH 31, 2021*

 

One Year
Return

 

Three Year
Return

 

Annualized
Inception to Date

   

Net Asset
Value

 

Market
Price^

 

Net Asset
Value

 

Market
Price^

 

Net Asset
Value

 

Market
Price^

KraneShares MSCI All China Health Care Index ETF

 

61.06

%

 

63.78

%‡

 

13.11

%‡

 

13.04

%‡

 

14.67

%‡

 

15.26

%‡

MSCI China All Shares Health Care 10/40 Index

 

N/A

 

 

63.50

%‡

 

N/A

 

 

13.65

%‡

 

N/A

 

 

15.50

%‡

S&P 500 Index

 

N/A

 

 

56.35

%‡

 

N/A

 

 

16.78

%‡

 

N/A

 

 

13.55

%‡

*       The Fund commenced operations on January 31, 2018.

‡      Unaudited.

^      Beginning December 23, 2020, market price returns are based on the official closing price of an ETF share or, if the official closing price isn’t available, the midpoint between the national best bid and national best offer (“NBBO”) as of the time the ETF calculates current NAV per share. Prior to that date, market price returns were based on the midpoint between the Bid and Ask price. NAVs are calculated using prices as of 4:00 PM Eastern Time.

The performance data quoted herein represents past performance and the return and value of an investment in the Fund will fluctuate so that, when redeemed, may be worth less than its original cost. Current performance may be lower or higher than the performance data quoted. Past performance is no guarantee of future performance and should not be considered as a representation of the future results of the Fund. For performance data current to the most recent month end, please call 855-857-2638 or visit www.kraneshares.com. The Fund’s performance assumes the reinvestment of all dividends and all capital gains. Index returns assume reinvestment of dividends and, unlike a Fund’s returns, do not reflect any fees or expenses. If such fees and expenses were included in the index returns, the performance would have been lower. As stated in the Fund’s prospectus, the Fund’s gross operating expense ratio is 0.79% and its net expense ratio

42

 

Management Discussion of Fund Performance (Unaudited) (continued)

KraneShares MSCI All China Health Care Index ETF (concluded)

is 0.65% due to a Fee Waiver whereby the Fund’s investment manager, Krane Funds Advisors, LLC, has contractually agreed to reduce its management fee by 0.14% of the Fund’s average daily net assets until August 1, 2021. Please note that one cannot invest directly in an unmanaged index. There are no assurances that the Fund will meet its stated objectives. The Fund’s holdings and allocations are subject to change and should not be considered recommendations to buy individual securities. For further information on the Fund’s objectives, risks, and strategies, see the Fund’s prospectus. Returns shown do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares.

43

Management Discussion of Fund Performance (Unaudited) (continued)

KraneShares CCBS China Corporate High Yield Bond USD Index ETF

The KraneShares CCBS China Corporate High Yield Bond USD Index ETF (the “Fund”) seeks to provide investment results that, before fees and expenses, track the price and yield performance of a specific fixed income securities index. The Fund’s current index is the Solactive USD China Corporate High Yield Bond Index (the “Underlying Index”).

The Underlying Index seeks to track the performance of outstanding high yield debt securities denominated in U.S. dollars issued by Chinese companies. For purposes of the Underlying Index, Chinese companies include companies that conduct the majority of their business activities in, are headquartered in or have the majority of their business assets, profits, or revenues in China or Hong Kong as determined by the index provider, Solactive, AG (“Index Provider”).

China Review

Global equity markets continued their upward trend in the second half of 2020, powered by growth and technology stocks as pandemic-induced trends favorable to the internet sector persisted worldwide. In 2021, vaccine availability turbocharged a global economic recovery, leading to a cyclical/value rotation that placed considerable pressure on growth stocks. This downside pressure was compounded by the March wind-down of leveraged bets. Meanwhile, the yield on the 10-Year US Treasury bond increased by nearly 0.75% in the first three months of 2021 from 0.92% to 1.64% despite no action from the US Federal Reserve (the Fed), accompanied by a rise in inflation in the United States. Growth and technology stocks in China followed a similar trajectory, reaching all-time highs before falling significantly. However, rates and inflation in China did not follow the US. This is a consequence of both China’s monetary response to the pandemic, which was more tactical, and China’s economy having recovered from the pandemic before the end of 2020, meaning that China experienced the inflationary effect of recovery earlier. Equity markets in the US, Europe, and China have pulled back from levels seen at the end of 2020 and beginning of 2021, though remain above pre-pandemic levels.

China USD-denominated high yield corporate bonds were a rare source of yield throughout the period amid a low interest rate environment globally. The period saw the Fund recover from its March 2020 low as economic activity returned to normal in China and many issuers in the Fund saw their incomes rise and their credit quality improve as a result.

We see four key positive catalysts for China’s equity and bond markets in the year to come:

•   With the release of the 14th Five Year Plan (FYP), we now know that China’s government will continue to support “new economy” sectors such as internet services, electric vehicles, green energy and technology, and communication services. Consumer products could also see a boost from the government’s desire to upgrade the consumption habits of China’s population.

•   Foreign inflows into China’s Mainland equity market are outpacing MSCI inclusion, providing a potential long-term tailwind for the market.

•   Domestic participation in China’s Mainland equity market is also likely to increase over the next few years as domestic household assets move from real estate into equities, leading to a potential tailwind for the market. Real estate investment accounts for, on average, nearly 60% of Chinese household savings compared to 33% in the United States.

•   Although the yield differential between China and the United States has narrowed over the past year, China’s 10-year government bond still offers a nearly 150 basis-point yield pickup over the 10-Year US Treasury.

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Management Discussion of Fund Performance (Unaudited) (continued)

KraneShares CCBS China Corporate High Yield Bond USD Index ETF (continued)

China capital market overview (April 1, 2020 to March 31, 2021)

•   China’s equity market, as measured by the MSCI China All Shares Index, was up for the period, returning +45.82%, while China’s currency, the renminbi (RMB) appreciated 7.5% against the US dollar.

•   The best performing sectors across China’s equity markets included Consumer Discretionary (+100.11%), Information Technology (+71.16%), and Consumer Staples (+64.25%).

•   The worst performing sectors across China’s equity markets were Real Estate (+15.12%), Financials (+20.16%), and Utilities (+32.24%).

By the Fund’s fiscal year end on March 31, 2021 (the “reporting period”), the NAV of the Fund increased by 12.32%, while the Underlying Index increased by 12.75%.

At the end of the reporting period, the Fund held 51.10% of the portfolio in the Industrials sector and 28.01% in cash.

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Management Discussion of Fund Performance (Unaudited) (continued)

KraneShares CCBS China Corporate High Yield Bond USD Index ETF (continued)

Growth of a $10,000 Investment‡

(at Net Asset Value)‡

AVERAGE TOTAL RETURN FOR THE PERIOD ENDED MARCH 31, 2021*

 

One Year
Return

 

Annualized
Inception to Date

   

Net Asset
Value

 

Market
Price^

 

Net Asset
Value

 

Market
Price^

KraneShares CCBS China Corporate High Yield Bond USD Index ETF

 

12.32

%

 

10.36

%‡

 

4.97

%‡

 

4.89

%‡

Solactive USD China Corporate High Yield Bond Index

 

N/A

 

 

12.75

%‡

 

N/A

 

 

6.40

%‡

Lipper China Region Funds Classification

 

N/A

 

 

57.88

%‡

 

N/A

 

 

14.83

%‡

*       The Fund commenced operations on June 26, 2018.

‡      Unaudited.

^      Beginning December 23, 2020, market price returns are based on the official closing price of an ETF share or, if the official closing price isn’t available, the midpoint between the national best bid and national best offer (“NBBO”) as of the time the ETF calculates current NAV per share. Prior to that date, market price returns were based on the midpoint between the Bid and Ask price. NAVs are calculated using prices as of 4:00 PM Eastern Time.

The performance data quoted herein represents past performance and the return and value of an investment in the Fund will fluctuate so that, when redeemed, may be worth less than its original cost. Current performance may be lower or higher than the performance data quoted. Past performance is no guarantee of future performance and should not be considered as a representation of the future results of the Fund. For performance data current to the most recent month end, please call 855-857-2638 or visit www.kraneshares.com. The Fund’s performance assumes the reinvestment of all dividends and all capital gains. Index returns assume reinvestment of dividends and, unlike a Fund’s returns, do not reflect any fees or expenses. If such fees and expenses were included in the index returns, the performance would have been lower. As stated in the Fund’s prospectus, the Fund’s operating expense ratio is 0.70%. Please note that one cannot invest directly in an unmanaged index. There are no assurances that the Fund will meet its stated

46

 

Management Discussion of Fund Performance (Unaudited) (continued)

KraneShares CCBS China Corporate High Yield Bond USD Index ETF (concluded)

objectives. The Fund’s holdings and allocations are subject to change and should not be considered recommendations to buy individual securities. For further information on the Fund’s objectives, risks, and strategies, see the Fund’s prospectus. Returns shown do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares.

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Management Discussion of Fund Performance (Unaudited) (continued)

KraneShares Emerging Markets Healthcare Index ETF

The KraneShares Emerging Markets Healthcare Index ETF (the ‘‘Fund’’) seeks to provide investment results that, before fees and expenses, correspond to the price and yield performance of the Solactive Emerging Markets Healthcare Index (the ‘‘Underlying Index’’).

The Underlying Index seeks to track the equity market performance of companies engaged in the health care sector in various emerging markets. The issuers include small-cap, mid-cap, and large-cap companies involved in hospital management, healthcare management, pharmaceutical manufacturing, and biotechnology, among other sub-industries.

Global/Emerging Markets Review

Global equity markets continued their upward trend in the second half of 2020, powered by growth and technology stocks as pandemic-induced trends favorable to the internet sector persisted worldwide. In 2021, vaccine availability turbocharged a global economic recovery, leading to a cyclical/value rotation that placed considerable pressure on growth stocks. This downside pressure was compounded by the March wind-down of leveraged bets. Meanwhile, the yield on the 10-Year US Treasury bond increased by nearly 0.75% in the first three months of 2021 from 0.92% to 1.64% despite no action from the US Federal Reserve (the Fed), accompanied by a rise in inflation in the United States. Growth and technology stocks in China followed a similar trajectory, reaching all-time highs before falling significantly. However, rates and inflation in China did not follow the US. This is a consequence of both China’s monetary response to the pandemic, which was more tactical, and China’s having recovered from the pandemic before the end of 2020, meaning that China experienced the inflationary effect of recovery earlier. Equity markets in the US, Europe, and China have pulled back from levels seen at the end of 2020 and beginning of 2021, though remain above pre-pandemic levels.

Emerging markets health care companies enjoyed positive share price performance for the period as the pandemic caused an increase in demand for healthcare services in the developing world. Pharmaceuticals and biotechnology made the greatest contributions to the Fund’s performance for the period.

We see three key positive catalysts for Emerging Markets equities in the year to come:

•   Vaccine distribution may improve in Emerging economies following the US decision to waive patent restrictions on vaccines globally and is the key to a full recovery in emerging economies.

•   The normalization of commodity prices and their meteoric rise in 2021 is likely to benefit commodities exporting countries such as Indonesia, Chile, and Argentina.

•   The COVID-19 pandemic turbocharged the adoption of E-Commerce across emerging economies. We believe E-Commerce companies in Emerging Markets such as Mercado Libre are likely to retain users and continue to grow revenues as these economies continue to move online.

Emerging Markets Overview (April 1, 2020 to March 31, 2021)

•   Emerging Market equities, as measured by the MSCI Emerging Markets Index, were up for the period, returning +58.86%.

•   The best performing sectors across the Emerging Market equity market included Information Technology (+103.94%), Materials (+96.45%), and Consumer Discretionary (+61.54%).

•   The worst performing sectors across the Emerging Market equity market included Real Estate (+20.20%), Utilities (+30.44%), and Consumer Staples (+34.12%).

48

 

Management Discussion of Fund Performance (Unaudited) (continued)

KraneShares Emerging Markets Healthcare Index ETF (continued)

By the Fund’s fiscal year end on March 31, 2021 (the “reporting period”), the NAV of the Fund increased by 60.18%, while the Underlying Index increased by 62.23%.

At the end of the reporting period, the Fund held 100% of the portfolio in the Health Care sector.

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Management Discussion of Fund Performance (Unaudited) (continued)

KraneShares Emerging Markets Healthcare Index ETF (continued)

Growth of a $10,000 Investment‡

(at Net Asset Value)‡

AVERAGE TOTAL RETURN FOR THE PERIOD ENDED MARCH 31, 2021*

 

One Year
Return

 

Annualized
Inception to Date

   

Net Asset
Value

 

Market
Price^

 

Net Asset
Value

 

Market
Price^

KraneShares Emerging Markets Healthcare Index ETF

 

60.18

%

 

61.48

%‡

 

12.57

%‡

 

12.93

%‡

Solactive Emerging Markets Healthcare Index

 

N/A

 

 

62.23

%‡

 

N/A

 

 

13.55

%‡

S&P 500 Index

 

N/A

 

 

56.35

%‡

 

N/A

 

 

14.87

%‡

*       The Fund commenced operations on August 29, 2018.

‡      Unaudited.

^      Beginning December 23, 2020, market price returns are based on the official closing price of an ETF share or, if the official closing price isn’t available, the midpoint between the national best bid and national best offer (“NBBO”) as of the time the ETF calculates current NAV per share. Prior to that date, market price returns were based on the midpoint between the Bid and Ask price. NAVs are calculated using prices as of 4:00 PM Eastern Time.

The performance data quoted herein represents past performance and the return and value of an investment in the Fund will fluctuate so that, when redeemed, may be worth less than its original cost. Current performance may be lower or higher than the performance data quoted. Past performance is no guarantee of future performance and should not be considered as a representation of the future results of the Fund. For performance data current to the most recent month end, please call 855-857-2638 or visit www.kraneshares.com. The Fund’s performance assumes the reinvestment of all dividends and all capital gains. Index returns assume reinvestment of dividends and, unlike a Fund’s returns, do not reflect any fees or expenses. If such fees and expenses were included in the index returns, the performance would have been lower. As stated in the Fund’s prospectus, the Fund’s operating expense ratio is 0.80%. Please note that one cannot invest directly in an unmanaged index. There are no assurances that the Fund will meet its stated

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