Annual Report

KraneShares CICC China Leaders 100 Index ETF

KraneShares CSI China Internet ETF

KraneShares Bosera MSCI China A 50 Connect Index ETF
(Formerly, KraneShares Bosera MSCI China A Share ETF)

KraneShares Bloomberg China Bond Inclusion Index ETF
(Formerly, KraneShares Bloomberg Barclays China Bond Inclusion Index 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

KraneShares Electric Vehicles and Future Mobility Index ETF

KraneShares MSCI All China Health Care Index ETF

KraneShares Asia Pacific High Income Bond ETF
(Formerly, KraneShares Asia Pacific High Yield Bond ETF)

KraneShares Emerging Markets Healthcare Index ETF

KraneShares MSCI Emerging Markets ex China Index ETF

KraneShares MSCI China ESG Leaders Index ETF

KraneShares CICC China 5G & Semiconductor Index ETF

KraneShares CICC China Consumer Leaders Index ETF

KraneShares SSE STAR Market 50 Index ETF

KraneShares Hang Seng TECH Index ETF

KraneShares China Innovation ETF

KraneShares Global Carbon Transformation ETF

KraneShares Global Carbon Strategy ETF
(Formerly, KraneShares Global Carbon ETF)

KraneShares European Carbon Allowance Strategy ETF
(Formerly, KraneShares European Carbon Allowance ETF)

KraneShares California Carbon Allowance Strategy ETF
(Formerly, KraneShares California Carbon Allowance ETF)

March 31, 2022

   

 

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

 

76

KraneShares Bosera MSCI China A 50 Connect Index ETF

 

79

KraneShares Bloomberg China Bond Inclusion Index ETF

 

82

KraneShares MSCI All China Index ETF

 

84

KraneShares MSCI One Belt One Road Index ETF

 

93

KraneShares Emerging Markets Consumer Technology Index ETF

 

101

KraneShares MSCI China Clean Technology Index ETF

 

106

KraneShares Electric Vehicles and Future Mobility Index ETF

 

110

KraneShares MSCI All China Health Care Index ETF

 

115

KraneShares Asia Pacific High Income Bond ETF

 

118

KraneShares Emerging Markets Healthcare Index ETF

 

124

KraneShares MSCI Emerging Markets ex China Index ETF

 

130

KraneShares MSCI China ESG Leaders Index ETF

 

146

KraneShares CICC China 5G & Semiconductor Index ETF

 

152

KraneShares CICC China Consumer Leaders Index ETF

 

154

KraneShares SSE STAR Market 50 Index ETF

 

156

KraneShares Hang Seng TECH Index ETF

 

158

KraneShares China Innovation ETF

 

160

KraneShares Global Carbon Transformation ETF

 

161

KraneShares Global Carbon Strategy ETF

 

165

KraneShares European Carbon Allowance Strategy ETF

 

166

KraneShares California Carbon Allowance Strategy ETF

 

167

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

 

168

Statements of Operations/Consolidated Statements of Operations

 

176

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

 

184

Financial Highlights/Consolidated Financial Highlights

 

204

Notes to Financial Statements/Consolidated Notes to Financial Statements

 

212

Report of Independent Registered Public Accounting Firm

 

240

Trustee and Officers of the Trust

 

243

Approval of Advisory and Sub-Advisory Agreements

 

246

Disclosure of Fund Expenses

 

254

Notice to Shareholders

 

257

Supplemental Information

 

260

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 their reports on Form N-PORT. The Funds’ Form N-PORT reports are available on the Commission’s website at http://www.sec.gov.

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 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, 2022.

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)

 

2.77

%

 

4.06

%(a)

 

-23.15

%(1)

KraneShares CSI China Internet ETF (KWEB)

 

-57.99

%

 

-57.84

%(b)

 

-23.15

%(1)

KraneShares Bosera MSCI China A 50 Connect ETF (KBA)

 

-7.96

%

 

-7.68

%(c)

 

-23.15

%(1)

KraneShares Bloomberg China Bond Inclusion Index ETF (KBND)

 

4.89

%

 

7.89

%(d)

 

-2.89

%(2)

KraneShares MSCI All China Index ETF (KALL)

 

-24.35

%

 

-24.20

%(e)

 

-23.15

%(1)

KraneShares MSCI One Belt One Road Index ETF (OBOR)

 

-1.11

%

 

-1.07

%(f)

 

14.23

%(3)

KraneShares Emerging Markets Consumer Technology Index ETF (KEMQ)

 

-43.57

%

 

-41.15

%(g)

 

-5.85

%(4)

KraneShares MSCI China Clean Technology Index ETF (KGRN)

 

-8.61

%

 

-11.48

%(h)

 

-23.15

%(1)

KraneShares Electric Vehicles and Future Mobility Index ETF (KARS)

 

0.04

%

 

2.18

%(i)

 

2.67

%(5)

KraneShares MSCI All China Health Care Index ETF (KURE)

 

-28.88

%

 

-28.03

%(j)

 

-23.15

%(1)

KraneShares Asia Pacific High Income Bond ETF (KHYB)

 

-19.73

%

 

-22.88

%(k)

 

-6.48

%(6)

KraneShares Emerging Markets Healthcare Index ETF (KMED)

 

-25.77

%

 

-25.63

%(l)

 

-5.85

%(4)

KraneShares MSCI Emerging Markets ex China Index ETF (KEMX)

 

0.57

%

 

2.07

%(m)

 

-5.85

%(4)

KraneShares MSCI China ESG Leaders Index ETF (KESG)

 

-27.63

%

 

-27.10

%(n)

 

N/A

 

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

 

-14.56

%

 

-12.44

%(o)

 

-23.15

%(1)

KraneShares CICC China Consumer Leaders Index ETF (KBUY)

 

-22.98

%

 

-21.51

%(p)

 

-23.15

%(1)

KraneShares SSE STAR Market 50 Index ETF (KSTR)

 

-10.92

%

 

-9.36

%(q)

 

-23.15

%(1)

KraneShares Hang Seng TECH Index ETF (KTEC)

 

-44.28

%^

 

-43.26

%(r)

 

-26.77

%(1)

KraneShares China Innovation ETF (KGRO)

 

-24.19

%^

 

N/A

 

 

N/A

 

KraneShares Global Carbon Transformation ETF (KGHG)

 

7.84

%^

 

N/A

 

 

N/A

 

KraneShares Global Carbon Strategy ETF (KRBN)

 

64.71

%

 

65.18

%(s)

 

N/A

 

KraneShares European Carbon Allowance Strategy ETF (KEUA)

 

15.24

%^

 

14.59

%(t)

 

N/A

 

KraneShares California Carbon Allowance Strategy ETF (KCCA)

 

3.08

%^

 

2.28

%(u)

 

N/A

 

*       Return based on net asset value as of March 31, 2022

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

**     Return as of March 31, 2022

 

Morningstar Peer
Group Median
Return

 

Morningstar Peer Group Name

   

(1)

 

-23.15%

 

U.S. ETF China Region

   

(2)

 

-2.89%

 

U.S. ETF Emerging Markets Local Currency Bond

   

(3)

 

14.23%

 

U.S. ETF Infrastructure

   

(4)

 

-5.85%

 

U.S. ETF Diversified Emerging Markets

   

(5)

 

2.67%

 

U.S. ETF Industrials

   

(6)

 

-6.48%

 

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 50 Connect Index ETF.

(d)    The underlying index for KraneShares Bloomberg China Bond Inclusion 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 Asia Pacific High Income Bond 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 CICC China 5G & Semiconductor Index ETF.

(p)    The underlying index for KraneShares CICC China Consumer Leaders Index ETF.

(q)    The underlying index for KraneShares SSE STAR Market 50 Index ETF.

(r)     The underlying index for KraneShares Hang Seng TECH Index ETF.

(s)    The underlying index for KraneShares Global Carbon Strategy ETF.

(t)     The underlying index for KraneShares European Carbon Allowance Strategy ETF.

(u)    The underlying index for KraneShares California Carbon Allowance Strategy 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 and/or Taiwan.

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 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 than 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 inequity securities of U.S. or non-U.S. 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.

2

 

Shareholder Letter (Unaudited) (concluded)

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.

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 in 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.

•   Despite near term volatility due to concerns surrounding inflation, new regulations, and delisting risk, we believe the further development of China’s capital markets offers a long-term growth proposition.

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

Thank you for investing with us.

Jonathan Krane, CEO
March 31, 2022

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-beta 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 A Share Review

Global equity markets made upward trends in the second half of 2021, as the world continued to recover from COVID-19. Equity markets in the U.S. and Europe were largely up for the period whereas China has experienced a bear market while remaining above pre-pandemic levels. However, a global equity and bond selloff occurred in the first quarter of 2022 as investors assessed the impact of the war in Ukraine, inflation, rising rates in the U.S., and supply chain disruptions, among other risks. Meanwhile, the yield on the 10-Year U.S. Treasury bond slightly increased by nearly 0.66% in the first three months of 2022 from 1.67% to 2.33% along with rising inflation in the United States. Interest rates in China did not follow the U.S. and fell by 0.10% during the same three-month period.

Mainland Chinese equities followed global equities higher in the second half of 2021 but fell slightly in the first three months of 2022. KFYP benefited from its exposure to the materials and industrials sectors, which saw strong performance within China A shares for the period.

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

•   China’s government seems to be adamant about supporting growth and reaching its GDP growth target of 5.5%, especially considering the political importance of 2022 as the National Party Congress (NPC) will convene to elect a president in the fall.

•   After battling through negative headlines, China’s internet companies saw some reprieve from a sentiment perspective in March 2022 after Vice Premier Liu He suggested that the latest regulatory cycle had come to an end and that China’s regulators were making good progress in solving issues surrounding the Holding Foreign Companies Accountable Act (HFCAA) by working with their counterparts in the US.

•   We believe the regulatory changes in real estate and falling property prices could redirect more flows to the equity markets. We believe the current economic cycle and regulations could provide tailwinds for the A-Shares markets in the short and long term, as many of the government’s goals will take decades to achieve.

China capital market overview (April 1, 2021 to March 31, 2022)

•   China’s equity market, as measured by the MSCI China All Shares Index, was down for the period, returning -24.20%, while China’s currency, the renminbi (RMB) appreciated 3.20% against the US dollar.

•   The best performing sectors across China’s equity markets included Energy (+49.39%), Materials (+4.75%), and Industrials (+1.21%).

•   The worst performing sectors across China’s equity markets were Real Estate (-33.73%), Communication Services (-38.30%), and Consumer Discretionary (-43.46%).

4

 

Management Discussion of Fund Performance (Unaudited) (continued)

KraneShares CICC China Leaders 100 Index ETF (continued)

By the Fund’s fiscal year end on March 31, 2022 (the “reporting period”), the NAV of the Fund increased by 2.77%, while the Underlying Index increased by 4.06%.

At the end of the reporting period, the Fund held 39.10% of the portfolio in the Financials sector and 20.17% in the Materials 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, 2022*

 

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

 

2.77

%

 

0.74

%‡

 

5.86

%‡

 

6.57

%‡

 

7.64

%‡

 

7.59

%‡

 

9.75

%‡

 

9.65

%‡

Hybrid KFYP Index (Net)**

 

N/A

 

 

4.06

%‡

 

N/A

 

 

7.77

%‡

 

N/A

 

 

7.44

%‡

 

N/A

 

 

10.04

%‡

S&P 500 Index

 

N/A

 

 

15.65

%‡

 

N/A

 

 

18.92

%‡

 

N/A

 

 

15.99

%‡

 

N/A

 

 

14.16

%‡

*       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 it more accurately reflects the market value of an ETF share at the time as of which the ETF calculates current NAV per share, the midpoint between the national best bid and national best offer (“NBBO”) as of that time. 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, shares may be worth less than their 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 Internet Review

China’s U.S. and Hong Kong-listed internet stocks exhibited a high level of volatility throughout the period due to concerns around the internet regulatory cycle in China and the delisting risk presented by the U.S. Holding Foreign Companies Accountable Act (HFCAA). Nonetheless, we continue to believe in the long-term prospects of China’s leading internet platforms and are encouraged by the generous share buyback and dividend packages announced by internet companies including Alibaba and JD.com, indicating boards’ belief that their stocks are undervalued.

The rollout of new regulations for China’s internet sector was swift and broad reaching, leading to investor uncertainty and a significant devaluation of internet stocks. Although many companies in China’s internet sector continued to grow revenues during the period of regulatory uncertainty and fines imposed were often more than covered by companies’ cash on hand, international investors sold off overseas-listed shares of China-based internet platforms. However, on March 16th, 2022, Vice Premier Liu He indicated that the internet regulatory cycle was coming to an end. As such, the first quarter of 2022 saw few enforcement actions.

In 2020, the U.S. passed the Holding Foreign Companies Accountable Act (HFCAA), which requires U.S.-listed foreign companies to allow the Public Company Accounting Board (PCAOB) to inspect their audit books and disclose government ownership, if any, or face delisting. While initially it appeared as though delisting might be inevitable, Vice Premier Liu He indicated in his March 16th speech that China and U.S. regulators had made good progress on solving the issue of audit reviews, suggesting that China’s law may change to allow for audit reviews by the PCAOB.

In response to the potential for delisting, and despite progress towards a solution, KWEB has begun to convert its U.S.-listed holdings to their Hong Kong-listed counterparts, where available. Although we remain optimistic about the prospects for a solution, we decided to carry on with our conversions to ensure that our clients are shielded from delisting risk. As of 31 March, 2022, KWEB was comprised of 73% Hong Kong listings, compared to only 25% on 31 March, 2021.

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

•   China’s government seems to be adamant about supporting growth and reaching its GDP growth target of 5.5%, especially considering the political importance of 2022 as the National Party Congress (NPC) will convene to elect a president in the fall.

•   After battling through negative headlines, China’s internet companies saw some reprieve from a sentiment perspective in March 2022 after Vice Premier Liu He suggested that the latest regulatory cycle had come to an end and that China’s regulators were making good progress in solving issues surrounding the Holding Foreign Companies Accountable Act (HFCAA) by working with their counterparts in the U.S.

8

 

Management Discussion of Fund Performance (Unaudited) (continued)

KraneShares CSI China Internet ETF (continued)

•   We believe the regulatory changes in real estate and falling property prices could redirect more flows to the equity markets. We believe the current economic cycle and regulations could provide tailwinds for the A-Shares markets in the short and long term, as many of the government’s goals will take decades to achieve.

China capital market overview (April 1, 2021 to March 31, 2022)

•   China’s equity market, as measured by the MSCI China All Shares Index, was down for the period returning -24.20%, while China’s currency, the renminbi (RMB) appreciated 3.2% against the U.S. dollar.

•   The best performing sectors across China’s equity markets included Energy (+49.39%), Materials (+4.75%), and Industrials (+1.21%).

•   The worst performing sectors across China’s equity markets were Real Estate (-33.73%), Communication Services (-38.30%), and Consumer Discretionary (-43.46%).

By the Fund’s fiscal year end on March 31, 2022 (the “reporting period”), the NAV of the Fund decreased by -57.99%, while the Underlying Index decreased by -57.84%.

At the end of the reporting period, the Fund held 42.91% of the portfolio in the Communication Services sector and 42.87% in the Consumer Discretionary sector.

9

 

Management Discussion of Fund Performance (Unaudited) (continued)

KraneShares CSI China Internet ETF (concluded)

Growth of a $10,000 Investment‡

(at Net Asset Value)‡

AVERAGE TOTAL RETURN FOR THE PERIOD ENDED MARCH 31, 2022*

 

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

 

-57.99

%

 

-59.83

%‡

 

-12.17

%‡

 

-13.19

%‡

 

-4.73

%‡

 

-5.44

%‡

 

3.60

%‡

 

3.18

%‡

CSI Overseas China Internet Index

 

N/A

 

 

-57.84

%‡

 

N/A

 

 

-11.80

%‡

 

N/A

 

 

-4.33

%‡

 

N/A

 

 

-3.78

%‡

S&P 500 Index

 

N/A

 

 

15.65

%‡

 

N/A

 

 

18.92

%‡

 

N/A

 

 

15.99

%‡

 

N/A

 

 

14.27

%‡

*       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 it more accurately reflects the market value of an ETF share at the time as of which the ETF calculates current NAV per share, the midpoint between the national best bid and national best offer (“NBBO”) as of that time. 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, shares may be worth less than their 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 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.

10

 

Management Discussion of Fund Performance (Unaudited) (continued)

KraneShares Bosera MSCI China A 50 Connect Index ETF

The KraneShares Bosera MSCI China A 50 Connect Index 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 50 Connect Index (the ‘‘Underlying Index’’).

The Underlying Index is constructed from the MSCI China A Index (the ‘Parent Index’), a broad-based benchmark index which captures large and mid-cap China A shares listed on the Shanghai and Shenzhen exchanges and accessible through the Northbound Stock Connect channel. The Index aims to reflect the performance of the 50 largest securities representing each Global Industry Classification Standard (GICS®) sector and reflecting the sector weight allocation of the Parent Index.

In 2021, the China Securities Regulatory Commission (CSRC) allowed the listing of A-Shares futures on the Hong Kong exchange, allowing investors to hedge and manage the risk of their A-Share exposure. Subsequently, MSCI launched the MSCI China A 50 Connect Index, which tracks the 50 largest and most liquid A shares for which Mainland-cleared hedging tools, such as futures, are available to foreign investors. On 8th November, 2021, the Fund began to track this index instead of the MSCI China A Index, in order to seek to reduce trading costs to the benefit of our clients.

China A Share Review:

Global equity markets followed an upward trend in the second half of 2021, as the world continued to recover from COVID-19. Equity markets in the U.S. and Europe were largely up for the period whereas China experienced a bear market while remaining above pre-pandemic levels. However, a global equity and bond selloff occurred in the first quarter of 2022 as investors assessed the impact of the war in Ukraine, inflation, rising rates in the U.S., and supply chain disruptions, among other risks. Meanwhile, the yield on the 10-Year U.S. Treasury bond slightly increased by nearly 0.66% in the first three months of 2022 from 1.67% to 2.33% along with rising inflation in the United States. Interest rates in China did not follow the U.S. and fell by 0.10% during the same three-month period.

Mainland China-listed equities (A Shares) were not spared from the downdraft in equities globally in the first quarter of 2022 following a modest bull market in 2021. However, Mainland China markets were less volatile than U.S. and European markets as China has not seen an equivalent rise in inflation nor a rise in government bond yields.

Liquidity conditions improved during the reporting period, to the benefit of Mainland-listed equities. The People’s Bank of China (PBOC), China’s central bank, loosened fiscal conditions during the period and cut key rates, which had remained stable through the pandemic and 2021.

China’s official Non-Manufacturing Purchasing Manager’s Index (PMI) was 48.4 in March, indicating a contraction in services demand, compared to an estimated 49.0 and February’s reading of 51.6, which indicated an expansion in services demand. China’s commitment to a COVID-19 zero policy and a decline in real estate prices dampened consumer confidence during the period, creating a significant headwind for Mainland China-listed equities. Furthermore, export demand has fallen significantly since the first half of 2021 as global stimulus fades, which also presented a headwind for Mainland-listed China equities. However, we believe China’s loose monetary stance could benefit equities in the near-term. Longer term, a real estate market rebound and/or an uptick in consumer sentiment may benefit Mainland-listed equities.

11

 

Management Discussion of Fund Performance (Unaudited) (continued)

KraneShares Bosera MSCI China A 50 Connect Index ETF (continued)

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

•   China’s government seems to be adamant about supporting growth and reaching its GDP growth target of 5.5%, especially considering the political importance of 2022 as the National Party Congress (NPC) will convene to elect a president in the fall.

•   After battling through negative headlines, China’s internet companies saw some reprieve from a sentiment perspective in March 2022 after Vice Premier Liu He suggested that the latest regulatory cycle had come to an end and that China’s regulators were making good progress in solving issues surrounding the Holding Foreign Companies Accountable Act (HFCAA) by working with their counterparts in the U.S.

•   We believe the regulatory changes in real estate and falling property prices could redirect more flows to the equity markets. We believe the current economic cycle and regulations could provide tailwinds for the A-Shares markets in the short and long term, as many of the government’s goals will take decades to achieve.

China capital market overview (April 1, 2021 to March 31, 2022)

•   China’s equity market, as measured by the MSCI China All Shares Index, was down for the period returning -24.20%, while China’s currency, the renminbi (RMB) appreciated 3.2% against the U.S. dollar.

•   The best performing sectors across China’s equity markets included Energy (+49.39%), Materials (+4.75%), and Industrials (+1.21%).

•   The worst performing sectors across China’s equity markets were Real Estate (-33.73%), Communication Services (-38.30%), and Consumer Discretionary (-43.46%).

By the Fund’s fiscal year end on March 31, 2022 (the “reporting period”), the NAV of the Fund decreased by -7.96%, while the Underlying Index decreased by -7.68%.

At the end of the reporting period, the Fund held 19.32% of the portfolio in the Financials sector and 15.86% in the Industrials sector.

12

 

Management Discussion of Fund Performance (Unaudited) (continued)

KraneShares Bosera MSCI China A 50 Connect Index ETF (continued)

Growth of a $10,000 Investment‡

(at Net Asset Value)‡

AVERAGE TOTAL RETURN FOR THE PERIOD ENDED MARCH 31, 2022*

 

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 50 Connect Index ETF

 

-7.96

%

 

-9.57

%‡

 

9.08

%‡

 

8.69

%‡

 

8.86

%‡

 

8.33

%‡

 

8.61

%‡

 

8.49

%‡

Hybrid KBA Index (Net)**

 

N/A

 

 

-7.68

%‡

 

N/A

 

 

9.77

%‡

 

N/A

 

 

8.02

%‡

 

N/A

 

 

9.61

%‡

S&P 500 Index

 

N/A

 

 

15.65

%‡

 

N/A

 

 

18.92

%‡

 

N/A

 

 

15.99

%‡

 

N/A

 

 

13.71

%‡

*       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 27, 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 it more accurately reflects the market value of an ETF share at the time as of which the ETF calculates current NAV per share, the midpoint between the national best bid and national best offer (“NBBO”) as of that time. 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, shares may be worth less than their 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

13

 

Management Discussion of Fund Performance (Unaudited) (continued)

KraneShares Bosera MSCI China A 50 Connect Index ETF (concluded)

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 0.56% due to a Fee Waiver whereby the Fund’s investment manager, Krane Funds Advisors, LLC, has contractually agreed to reduce its management fee by 0.23% of the Fund’s average daily net assets until August 1, 2022. 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.

14

 

Management Discussion of Fund Performance (Unaudited) (continued)

KraneShares Bloomberg China Bond Inclusion Index ETF

The KraneShares Bloomberg China Bond Inclusion Index ETF (the ‘‘Fund’’) seeks to provide investment results that, before fees and expenses, correspond to the price and yield performance of the Bloomberg China Inclusion Focused Bond Index (the ‘‘Underlying Index’’).

The Underlying Index is designed to track the performance of China’s onshore renminbi-denominated bond market. The Fund seeks to invest at least 80% of its assets in a basket of fixed income securities.

China Bond Market Review:

The yield on the 10-Year U.S. Treasury bond slightly increased by nearly 0.66% in the first three months of 2022 from 1.67% to 2.33% along with rising inflation in the United States. Interest rates in China did not follow the U.S. and fell by 0.10% during the same three-month period after remaining stable throughout 2021.

China’s government bonds offered a higher yield compared to U.S. treasuries (by 45 bps as of Q1 2022) and bonds offered by many European governments throughout the reporting period. China’s currency also continued to appreciate against the U.S. dollar, by 3.2% for the reporting period. However, rising rates in the U.S. may cause U.S. Treasury bonds to offer a yield that is on par with Chinese Treasury bonds, at least for those with tenors of 10 years or less. We believe this may lead to price pressure on some of the bonds held in the portfolio.

Moody’s continues to rate China as an A1 sovereign issuer thanks to the country’s steadily maintained foreign reserves, which currently total around $3 trillion, and government debt to GDP ratio of around 70% (as of Q4 2020).

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

•   China’s government seems to be adamant about supporting growth and reaching its GDP growth target of 5.5%, especially considering the political importance of 2022 as the National Party Congress (NPC) will convene to elect a president in the fall.

•   After battling through negative headlines, China’s internet companies saw some reprieve from a sentiment perspective in March 2022 after Vice Premier Liu He suggested that the latest regulatory cycle had come to an end and that China’s regulators were making good progress in solving issues surrounding the Holding Foreign Companies Accountable Act (HFCAA) by working with their counterparts in the U.S.

•   We believe the regulatory changes in real estate and falling property prices could redirect more flows to the equity markets. We believe the current economic cycle and regulations could provide tailwinds for the A-Shares markets in the short and long term, as many of the government’s goals will take decades to achieve.

China capital market overview (April 1, 2021 to March 31, 2022)

•   China’s equity market, as measured by the MSCI China All Shares Index, was down for the period returning -24.20%, while China’s currency, the renminbi (RMB) appreciated 3.2% against the U.S. dollar.

•   The best performing sectors across China’s equity markets included Energy (+49.39%), Materials (+4.75%), and Industrials (+1.21%).

•   The worst performing sectors across China’s equity markets were Real Estate (-33.73%), Communication Services (-38.30%), and Consumer Discretionary (-43.46%).

15

 

Management Discussion of Fund Performance (Unaudited) (continued)

KraneShares Bloomberg China Bond Inclusion Index ETF (continued)

By the Fund’s fiscal year end on March 31, 2022 (the “reporting period”), the NAV of the Fund increased by 4.89%, while the Underlying Index increased by 7.89%.

At the end of the reporting period, the Fund held 94.44% of the portfolio in cash and 5.56% in the Financials sector.

16

 

Management Discussion of Fund Performance (Unaudited) (continued)

KraneShares Bloomberg China Bond Inclusion Index ETF (continued)

Growth of a $10,000 Investment‡

(at Net Asset Value)‡

AVERAGE TOTAL RETURN FOR THE PERIOD ENDED MARCH 31, 2022*

 

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 Bloomberg China Bond Inclusion Index ETF

 

4.89

%

 

4.33

%‡

 

3.89

%‡

 

3.73

%‡

 

4.39

%‡

 

4.38

%‡

 

2.28

%‡

 

2.19

%‡

Bloomberg China Inclusion Focused Bond Index

 

N/A

 

 

7.89

%‡

 

N/A

 

 

5.28

%‡

 

N/A

 

 

5.43

%‡

 

N/A

 

 

3.29

%‡

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

 

N/A

 

 

0.00

%‡

 

N/A

 

 

0.90

%‡

 

N/A

 

 

1.19

%‡

 

N/A

 

 

0.92

%‡

S&P 500 Index

 

N/A

 

 

15.65

%‡

 

N/A

 

 

18.92

%‡

 

N/A

 

 

15.99

%‡

 

N/A

 

 

13.45

%‡

*       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 it more accurately reflects the market value of an ETF share at the time as of which the ETF calculates current NAV per share, the midpoint between the national best bid and national best offer (“NBBO”) as of that time. 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, shares may be worth less than their 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

17

 

Management Discussion of Fund Performance (Unaudited) (continued)

KraneShares Bloomberg China Bond Inclusion Index ETF (concluded)

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 0.69% and its net expense ratio is 0.49% 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 0.20% of the Fund’s average daily net assets until August 1, 2022. 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.

18

 

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.

Broad China Review:

Global equity markets followed an upward trend in the second half of 2021, as the world continued to recover from COVID-19. Equity markets in the U.S. and Europe were largely up for the period whereas China has experienced a bear market while remaining above pre-pandemic levels. However, a global equity and bond selloff occurred in the first quarter of 2022 as investors assessed the impact of the war in Ukraine, inflation, rising rates in the U.S., and supply chain disruptions, among other risks. Meanwhile, the yield on the 10-Year U.S. Treasury bond slightly increased by nearly 0.66% in the first three months of 2022 from 1.67% to 2.33% along with rising inflation in the United States. Interest rates in China didn’t follow the U.S. and have fallen by 0.10% during the same three-month period.

The performance of broad China equities was negatively impacted during the period by a multitude of factors including the China internet regulatory cycle in 2021, a global equity selloff in the first quarter, a slump in consumer confidence in China in late 2021 and early 2022, and delisting risk stemming from the Holding Foreign Companies Accountable Act (HFCAA).

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

•   China’s government seems to be adamant about supporting growth and reaching its GDP growth target of 5.5%, especially considering the political importance of 2022 as the National Party Congress (NPC) will convene to elect a president in the fall.

•   After battling through negative headlines, China’s internet companies saw some reprieve from a sentiment perspective in March 2022 after Vice Premier Liu He suggested that the latest regulatory cycle had come to an end and that China’s regulators were making good progress in solving issues surrounding the Holding Foreign Companies Accountable Act (HFCAA) by working with their counterparts in the U.S.

•   We believe the regulatory changes in real estate and falling property prices could redirect more flows to the equity markets. We believe the current economic cycle and regulations could provide tailwinds for the A-Shares markets in the short and long term, as many of the government’s goals will take decades to achieve.

China capital market overview (April 1, 2021 to March 31, 2022)

•   China’s equity market, as measured by the MSCI China All Shares Index, was down for the period returning -24.20%, while China’s currency, the renminbi (RMB) appreciated 3.2% against the U.S. dollar.

•   The best performing sectors across China’s equity markets included Energy (+49.39%), Materials (+4.75%), and Industrials (+1.21%).

•   The worst performing sectors across China’s equity markets were Real Estate (-33.73%), Communication Services (-38.30%), and Consumer Discretionary (-43.46%).

19

 

Management Discussion of Fund Performance (Unaudited) (continued)

KraneShares MSCI All China Index ETF (continued)

By the Fund’s fiscal year end on March 31, 2022 (the “reporting period”), the NAV of the Fund decreased by -24.35%, while the Underlying Index decreased by -24.20%.

At the end of the reporting period, the Fund held 30.46% of the portfolio in Information Technology, 26.17% in Financials, 10.76% in Materials, 7.46% in Communication Services, 5.98% in Energy, 5.86% in Consumer Staples, 5.10% in Consumer Discretionary, 3.84% in Industrials, 1.57% in Healthcare, 1.50% in Utilities, and 1.03% in Real Estate.

20

 

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, 2022*

 

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

 

-24.35

%

 

-26.01

%‡

 

1.60

%‡

 

0.80

%‡

 

4.13

%‡

 

3.75

%‡

 

2.60

%‡

 

2.42

%‡

Hybrid KALL Index (Net)**

 

N/A

 

 

-24.20

%‡

 

N/A

 

 

1.31

%‡

 

N/A

 

 

3.74

%‡

 

N/A

 

 

2.95

%‡

S&P 500 Index

 

N/A

 

 

15.65

%‡

 

N/A

 

 

18.92

%‡

 

N/A

 

 

15.99

%‡

 

N/A

 

 

13.61

%‡

*       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 it more accurately reflects the market value of an ETF share at the time as of which the ETF calculates current NAV per share, the midpoint between the national best bid and national best offer (“NBBO”) as of that time. 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, shares may be worth less than their 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

21

 

Management Discussion of Fund Performance (Unaudited) (continued)

KraneShares MSCI All China Index ETF (concluded)

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, 2022. 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.

22

 

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 is designed to measure the equity market performance of listed companies with high revenue exposure to the Chinese government’s “One Belt, One Road” (“OBOR”) initiative, as determined by the provider of the Underlying Index, MSCI Inc. based on companies’ industry classifications. The OBOR initiative is designed to increase the interconnectedness between China and other Eurasian countries by making infrastructure investments that are expected to increase such interconnectedness, such as building new roads and improved communications networks.

Global/Emerging Markets/Belt & Road Review:

Global equity markets followed an upward trend in the second half of 2021, as the world continued to recover from COVID-19. Equity markets in the U.S. and Europe were largely up for the period whereas China has experienced a bear market while remaining above pre-pandemic levels. However, a global equity and bond selloff occurred in the first quarter of 2022 as investors assessed the impact of the war in Ukraine, inflation, rising rates in the U.S., and supply chain disruptions, among other risks. Meanwhile, the yield on the 10-Year U.S. Treasury bond slightly increased by nearly 0.66% in the first three months of 2022 from 1.67% to 2.33% along with rising inflation in the United States. Interest rates in China did not follow the U.S. and fell by 0.10% during the same three-month period.

The invasion of Ukraine has stoked fears of inflation, volatility, and uncertainty for emerging markets around the globe. However, several countries, such as Brazil, have benefitted from higher commodity prices, along with South Africa and Saudi Arabia. Looking forward, it is difficult to ascertain the direction emerging markets will take as global supply chains struggle and the potential for further monetary policy tightening looms.

Most projects under the China’s One Belt One Road Initiative (also known as the Belt & Road Initiative) have now resumed work following pandemic-induced disruptions. Energy and power companies, namely coal, consumable fuels, and renewables, were among the Fund’s top performing holdings for the year as countries globally had to reconsider their energy sourcing following the conflict in Ukraine’s disruption to their energy sectors. Natural gas companies have subsequently been on the decline as prices continue to soar higher and pipeline channels have been disrupted. Companies specializing in electrical components and equipment for batteries and energy storage also performed well and should continue to be a catalyst for growth as they play a key role in advancing the development of emerging technologies.

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

•   Several countries outside the sphere of the conflict may potentially benefit from exporting various commodities like oil and metals.

•   The aftermath of the pandemic still bears signs of E-Commerce penetration continuing to rise across emerging economies along with the digitalization of other economic activities such as health care and financial services.

23

 

Management Discussion of Fund Performance (Unaudited) (continued)

KraneShares MSCI One Belt One Road Index ETF (continued)

Emerging Markets Overview (April 1, 2021 to March 31, 2022)

•   Emerging Market equities, as measured by the MSCI Emerging Markets Index, were down for the period, returning -11.37%.

•   The best performing sectors across the Emerging Market equity market included Financials (+12.39%), Utilities (+11.51%), and Materials (+6.95%).

•   The worst performing sectors across the Emerging Market equity market included Health Care (-25.35%), Real Estate (-27.77%), and Consumer Discretionary (-39.42%).

By the Fund’s fiscal year end on March 31, 2022 (the “reporting period”), the NAV of the Fund decreased by -1.11%, while the Underlying Index decreased by -1.07%.

At the end of the reporting period, the Fund held 33.87% of the portfolio in Industrials, 28.19% in Materials, 15.98% in Financials, 10.95% in Utilities, and 10.51% in Energy.

24

 

Management Discussion of Fund Performance (Unaudited) (continued)

KraneShares MSCI One Belt One Road Index ETF (concluded)

Growth of a $10,000 Investment‡

(at Net Asset Value)‡

AVERAGE TOTAL RETURN FOR THE PERIOD ENDED MARCH 31, 2022*

 

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

 

-1.11

%

 

-1.83

%‡

 

8.66

%‡

 

8.75

%‡

 

5.05

%‡

 

5.10

%‡

MSCI Global China Infrastructure Exposure Index (Net)

 

N/A

 

 

-1.07

%‡

 

N/A

 

 

10.03

%‡

 

N/A

 

 

6.30

%‡

S&P 500 Index

 

N/A

 

 

15.65

%‡

 

N/A

 

 

18.92

%‡

 

N/A

 

 

16.32

%‡

*       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 it more accurately reflects the market value of an ETF share at the time as of which the ETF calculates current NAV per share, the midpoint between the national best bid and national best offer (“NBBO”) as of that time. 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, shares may be worth less than their 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 0.79%. 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.

25

 

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 is composed of the equity securities of the 50 largest companies by market capitalization that derive the most revenue from an emerging and frontier market and classified by the FactSet Revere Business Industry Classification system or FactSet Standard Classification system as in the consumer or technology sector.

Emerging Markets Review:

Global equity markets followed an upward trend in the second half of 2021, as the world continued to recover from COVID-19. Equity markets in the U.S. and Europe were largely up for the period whereas China has experienced a bear market while remaining above pre-pandemic levels. However, a global equity and bond selloff occurred in the first quarter of 2022 as investors assessed the impact of the war in Ukraine, inflation, rising rates in the U.S., and supply chain disruptions, among other risks. Meanwhile, the yield on the 10-Year U.S. Treasury bond slightly increased by nearly 0.66% in the first three months of 2022 from 1.67% to 2.33% along with rising inflation in the United States. Interest rates in China did not follow the U.S. and have fallen by 0.10% during the same three-month period.

The invasion of Ukraine has stoked fears of inflation, volatility, and uncertainty for emerging markets around the globe. However, several countries, such as Brazil, have benefitted from higher commodity prices, along with South Africa and Saudi Arabia. Looking forward, it is difficult to ascertain the direction emerging markets will take as global supply chains struggle and the potential looms for monetary policy tightening.

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

•   Several countries outside the sphere of the conflict may potentially benefit from exporting various commodities like oil and metals.

•   The aftermath of the pandemic still bears signs of E-Commerce penetration continuing to rise across emerging economies along with the digitalization of other economic activities such as health care and financial services.

Emerging Markets Overview (April 1, 2021 to March 31, 2022)

•   Emerging Market equities, as measured by the MSCI Emerging Markets Index, were down for the period, returning -11.37%.

•   The best performing sectors across the Emerging Market equity market included Financials (+12.39%), Utilities (+11.51%), and Materials (+6.95%).

•   The worst performing sectors across the Emerging Market equity market included Health Care (-25.35%), Real Estate (-27.77%), and Consumer Discretionary (-39.42%).

By the Fund’s fiscal year end on March 31, 2022 (the “reporting period”), the NAV of the Fund decreased by -43.57%, while the Underlying Index decreased by -41.15%.

At the end of the reporting period, the Fund held 42.15% of the portfolio in the Consumer Discretionary sector and 40.39% in the Communication Services sector.

26

 

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, 2022*

 

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

 

-43.57

%

 

-44.49

%‡

 

-6.35

%‡

 

-6.83

%‡

 

-6.13

%‡

 

-6.40

%‡

Solactive Emerging Markets Consumer Technology Index

 

N/A

 

 

-41.15

%‡

 

N/A

 

 

-4.55

%‡

 

N/A

 

 

-4.36

%‡

S&P 500 Index

 

N/A

 

 

15.65

%‡

 

N/A

 

 

18.92

%‡

 

N/A

 

 

15.71

%‡

*       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 it more accurately reflects the market value of an ETF share at the time as of which the ETF calculates current NAV per share, the midpoint between the national best bid and national best offer (“NBBO”) as of that time. 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, shares may be worth less than their 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 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, 2022.

27

 

Management Discussion of Fund Performance (Unaudited) (continued)

KraneShares Emerging Markets Consumer Technology Index ETF (concluded)

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.

28

 

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 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 Clean Technology Review:

Global equity markets followed an upward trend in the second half of 2021, as the world continued to recover from covid. Equity markets in the US and Europe were largely up for the period whereas China has experienced a bear market while remaining above pre-pandemic levels. Meanwhile, the yield on the 10-Year US Treasury bond slightly increased by nearly 0.66% in the first three months of 2022 from 1.67% to 2.33% along with rising inflation in the United States. Interest rates in China didn’t follow the US and have fallen by 0.10% during the same three-month period.

Renewable electricity, electrical components, and semiconductors were among the top performing industries for the year. Companies in these sectors were beneficiaries of not only domestic demand stemming from China’s commitment to reaching carbon neutrality by 2060, but also from soaring international demand. We believe the current conflict in Ukraine could lead to increased demand for renewable and alternative sources of energy, especially in the European region, which was previously heavily reliant on Russian imports of oil and natural gas.

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

•   China’s government seems to be adamant about supporting growth and reaching its GDP growth target of 5.5%, especially considering the political importance of 2022 as the National Party Congress (NPC) will convene to elect a president in the fall.

•   After battling through negative headlines, China’s internet companies saw some reprieve from a sentiment perspective in March 2022 after Vice Premier Liu He suggested that the latest regulatory cycle had come to an end and that China’s regulators were making good progress in solving issues surrounding the Holding Foreign Companies Accountable Act (HFCAA) by working with their counterparts in the US.

•   We believe the regulatory changes in real estate and falling property prices could redirect more flows to the equity markets. We believe the current economic cycle and regulations could provide tailwinds for the A-Shares markets in the short and long term, as many of the government’s goals will take decades to achieve.

29

 

Management Discussion of Fund Performance (Unaudited) (continued)

KraneShares MSCI China Clean Technology Index ETF (continued)

China capital market overview (April 1 2021 to March 31, 2022)

•   China’s equity market, as measured by the MSCI China All Shares Index, was down for the period returning -24.20%, while China’s currency, the renminbi (RMB) appreciated 3.2% against the US dollar.

•   The best performing sectors across China’s equity markets included Energy (+49.39%), Materials (+4.75%), and Industrials (+1.21%).

•   The worst performing sectors across China’s equity markets were Real Estate (-33.73%), Communication Services (-38.30%), and Consumer Discretionary (-43.46%).

By the Fund’s fiscal year end on March 31, 2022 (the “reporting period”), the NAV of the Fund decreased by -8.61%, while the Underlying Index decreased by -11.48%.

At the end of the reporting period, the Fund held 37.00% of the portfolio in Consumer Discretionary, 26.21% in Industrials, 17.88% in Information Technology, 13.64% in Utilities, 4.79% in Real Estate, and 0.49% in Materials.

30

 

Management Discussion of Fund Performance (Unaudited) (continued)

KraneShares MSCI China Clean Technology Index ETF (concluded)

Growth of a $10,000 Investment‡

(at Net Asset Value)‡

AVERAGE TOTAL RETURN FOR THE PERIOD ENDED MARCH 31, 2022*

 

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

 

-8.61

%

 

-10.24

%‡

 

24.47

%‡

 

24.44

%‡

 

11.03

%‡

 

10.97

%‡

MSCI China IMI Environment 10/40 Index (Net)

 

N/A

 

 

-11.48

%‡

 

N/A

 

 

21.50

%‡

 

N/A

 

 

9.53

%‡

S&P 500 Index

 

N/A

 

 

15.65

%‡

 

N/A

 

 

18.92

%‡

 

N/A

 

 

15.77

%‡

*       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 it more accurately reflects the market value of an ETF share at the time as of which the ETF calculates current NAV per share, the midpoint between the national best bid and national best offer (“NBBO”) as of that time. 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, shares may be worth less than their 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 0.78%. 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 Electric Vehicles and Future Mobility Index ETF

The KraneShares Electric Vehicles & Future Mobility ETF (the “Fund”) seeks to provide investment results that, before fees and expenses, track the price and yield performance of the Bloomberg Electric Vehicles Index (the “Underlying Index”).

The Underlying Index provides exposure to companies engaged in the production of electric vehicles and/or their components. 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 electric infrastructure businesses.

Electric Vehicles Review:

Global equity markets followed an upward trend in the second half of 2021, as the world continued to recover from covid. Equity markets in the US and Europe were largely up for the period whereas China has experienced a bear market while remaining above pre-pandemic levels. Meanwhile, the yield on the 10-Year US Treasury bond slightly increased by nearly 0.66% in the first three months of 2022 from 1.67% to 2.33% along with rising inflation in the United States. Interest rates in China didn’t follow the US and have fallen by 0.10% during the same three-month period.

Global sales of electric vehicles (EVs) more than doubled in 2021 vs. 2020 and tripled from 2019. While the global EV market share remains small, we are still seeing major increases in EV production, development, and sales. Wide ranging government policy and support, the rollout of several new models, and companies pledging more EV production have been the main drivers of positive performance in the space. China was the leader of EV growth for 2021, selling over 3.4 million EVs worldwide. The US and Europe also displayed strong sales.

By the Fund’s fiscal year end on March 31, 2022 (the “reporting period”), the NAV of the Fund increased by 0.04%, while the Underlying Index increased by 2.18%.

At the end of the reporting period, the Fund held 46.98% of the portfolio in the Consumer Discretionary sector and 20.24% in the Information Technology sector.

32

 

Management Discussion of Fund Performance (Unaudited) (continued)

KraneShares Electric Vehicles and Future Mobility Index ETF (concluded)

Growth of a $10,000 Investment‡

(at Net Asset Value)‡

AVERAGE TOTAL RETURN FOR THE PERIOD ENDED MARCH 31, 2022*

 

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

 

0.04

%

 

-0.54

%‡

 

27.83

%‡

 

27.48

%‡

 

14.22

%‡

 

14.14

%‡

Solactive Electric Vehicles and Future Mobility Index

 

N/A

 

 

2.18

%‡

 

N/A

 

 

29.29

%‡

 

N/A

 

 

14.95

%‡

S&P 500 Index

 

N/A

 

 

15.65

%‡

 

N/A

 

 

18.92

%‡

 

N/A

 

 

14.18

%‡

*       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 it more accurately reflects the market value of an ETF share at the time as of which the ETF calculates current NAV per share, the midpoint between the national best bid and national best offer (“NBBO”) as of that time. 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, shares may be worth less than their 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 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.

33

 

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 Health Care Review:

Global equity markets followed an upward trend in the second half of 2021, as the world continued to recover from covid. Equity markets in the US and Europe have largely been up for the period whereas China has experienced a bear market while remaining above pre-pandemic levels. Meanwhile, the yield on the 10-Year US Treasury bond slightly increased by nearly 0.66% in the first three months of 2022 from 1.67% to 2.33% along with rising inflation in the United States. Interest rates in China didn’t follow the US and have fallen by 0.10% during the same three-month period.

China’s leading biotechnology and other health care companies have continued to grow revenues rapidly over the past two years and are expected to see strong growth in the years to come. However, concerns over domestic regulation, increased domestic competition, US Food and Drug Administration (FDA) rejections of China-made medications, and delisting risks have led to a significant downdraft in the shares of China-based health care companies.

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

•   China’s government seems to be adamant about supporting growth and reaching its GDP growth target of 5.5%, especially considering the political importance of 2022 as the National Party Congress (NPC) will convene to elect a president in the fall.

•   After battling through negative headlines, China’s internet companies saw some reprieve from a sentiment perspective in March 2022 after Vice Premier Liu He suggested that the latest regulatory cycle had come to an end and that China’s regulators were making good progress in solving issues surrounding the Holding Foreign Companies Accountable Act (HFCAA) by working with their counterparts in the US.

We believe the regulatory changes in real estate and falling property prices could redirect more flows to the equity markets. We believe the current economic cycle and regulations could provide tailwinds for the A-Shares markets in the short and long term, as many of the government’s goals will take decades to achieve.

34

 

Management Discussion of Fund Performance (Unaudited) (continued)

KraneShares MSCI All China Health Care Index ETF (continued)

China capital market overview (April 1 2021 to March 31, 2022)

•   China’s equity market, as measured by the MSCI China All Shares Index, was down for the period returning -24.20%, while China’s currency, the renminbi (RMB) appreciated 3.2% against the US dollar.

•   The best performing sectors across China’s equity markets included Energy (+49.39%), Materials (+4.75%), and Industrials (+1.21%).

•   The worst performing sectors across China’s equity markets were Real Estate (-33.73%), Communication Services (-38.30%), and Consumer Discretionary (-43.46%).

By the Fund’s fiscal year end on March 31, 2022 (the “reporting period”), the NAV of the Fund decreased by -28.88%, while the Underlying Index decreased by -28.03%.

At the end of the reporting period, the Fund held 99.90% of the portfolio in the health care sector.

35

 

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, 2022*

 

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

 

-28.88

%

 

-31.46

%‡

 

7.00

%‡

 

6.49

%‡

 

2.25

%‡

 

1.74

%‡

MSCI China All Shares Health Care 10/40 Index

 

N/A

 

 

-28.03

%‡

 

N/A

 

 

8.25

%‡

 

N/A

 

 

3.09

%‡

S&P 500 Index

 

N/A

 

 

15.65

%‡

 

N/A

 

 

18.92

%‡

 

N/A

 

 

14.05

%‡

*       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 it more accurately reflects the market value of an ETF share at the time as of which the ETF calculates current NAV per share, the midpoint between the national best bid and national best offer (“NBBO”) as of that time. 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, shares may be worth less than their 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 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, 2022. Please note that one cannot invest directly in an unmanaged index. There are

36

 

Management Discussion of Fund Performance (Unaudited) (continued)

KraneShares MSCI All China Health Care Index ETF (concluded)

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.

37

 

Management Discussion of Fund Performance (Unaudited) (continued)

KraneShares Asia Pacific High Income Bond ETF

KHYB is an active ETF managed by sub-advisor Nikko Asset Management Americas, Inc. (“Nikko”). KHYB is benchmarked to the JP Morgan Asia Credit Index (JACI) Non-Investment Grade Corporate Index. The fund provides exposure to USD-denominated high yield debt securities issued by companies in Asia.

On August 2, 2021, the KraneShares CCBS China Corporate High Yield Bond USD Index ETF was converted into the KraneShares Asia Pacific High Income Bond ETF.

Asia Pacific High Income Bond Review:

The yield on the 10-Year US Treasury bond slightly increased by nearly 0.66% in the first three months of 2022 from 1.67% to 2.33% along with rising inflation in the United States. Interest rates in China did not follow the US and fell by 0.10% during the same three-month period after remaining stable throughout 2021.

Through exposure to the Asia high yield bond market investors can benefit from strong corporate balance sheets, relatively short durations, and high economic growth. Asia high yield bonds, represented by the JP Morgan Asia Credit Non-Investment Grade Index, saw a declines over the reporting period mostly due to the restructuring of mega developer Evergrande and the ensuing turmoil in China’s real estate market as the index tends to be concentrated in the property development industry. However, property prices in China have begun to stabilize and any improvement in market sentiment in real estate is likely to benefit the Fund. Furthermore, we believe that the Fund looks increasingly attractive as rates rise in the US, given its relatively low durations, high yields, and wide spreads compared to the US.

We see two key positive catalysts for Asia Pacific high income bonds:

•   Spreads that are currently far wider than in the US and the potential for price returns as those spreads compress.

•   Rising rates in the US, leading to the favorability of higher yielding Asian issuers that offer lower durations and thereby lower interest rate risk.

China capital market overview (April 1 2021 to March 31, 2022)

•   China’s equity market, as measured by the MSCI China All Shares Index, was down for the period returning -24.20%, while China’s currency, the renminbi (RMB) appreciated 3.2% against the US dollar.

•   The best performing sectors across China’s equity markets included Energy (+49.39%), Materials (+4.75%), and Industrials (+1.21%).

•   The worst performing sectors across China’s equity markets were Real Estate (-33.73%), Communication Services (-38.30%), and Consumer Discretionary (-43.46%).

By the Fund’s fiscal year end on March 31, 2022 (the “reporting period”), the NAV of the Fund decreased by -19.73, while the Underlying Index decreased by -22.88% .

38

 

Management Discussion of Fund Performance (Unaudited) (continued)

KraneShares Asia Pacific High Income Bond ETF (concluded)

Growth of a $10,000 Investment‡

(at Net Asset Value)‡

AVERAGE TOTAL RETURN FOR THE PERIOD ENDED MARCH 31, 2022*

 

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 Asia Pacific High Income Bond ETF

 

-19.73

%

 

-19.28

%‡

 

-4.61

%‡

 

-4.58

%‡

 

-2.26

%‡

 

-2.17

%‡

J.P. Morgan Asia Credit (JACI) Non-Investment Grade Corporates Index

 

N/A

 

 

-22.88

%‡

 

N/A

 

 

-4.75

%‡

 

N/A

 

 

-1.78

%‡

Lipper China Region Funds Classification

 

N/A

 

 

-25.53

%‡

 

N/A

 

 

2.83

%‡

 

N/A

 

 

2.20

%‡

*       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 it more accurately reflects the market value of an ETF share at the time as of which the ETF calculates current NAV per share, the midpoint between the national best bid and national best offer (“NBBO”) as of that time. 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, shares may be worth less than their 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.

39

 

Management Discussion of Fund Performance (Unaudited) (continued)

KraneShares Emerging Markets Healthcare Index ETF

The KraneShares Emerging Market Healthcare 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 Healthcare Index (the “Underlying Index”).

The Underlying Index is a modified, free float adjusted market capitalization weighted index designed to measure the equity market performance of emerging market companies classified by FactSet Revere Business Industry Classification system (“RBICS”) as being in the health technology or health services industries. The Underlying Index includes companies that RBICS classifies as engaged in the pharmaceuticals, biotechnology, medical specialties, managed health care, hospital/nursing management, medical/nursing services and services to the health industry businesses. The Underlying Index may include small-cap, mid-cap and large-cap companies.

During the reporting period, shares of emerging markets health care companies experienced a significant downdraft as investors questioned the pandemic recovery in the developing world, especially in India and Southeast Asia, and a stronger dollar hurt the performance of emerging markets equities overall. Meanwhile, concerns over domestic regulation, increased domestic competition, US Food and Drug Administration (FDA) rejections of China-made medications, and delisting risks have led to a significant downdraft in the shares of China-based health care companies.

Emerging Markets Health Care Review:

Global equity markets made upward trends in the second half of 2021, as the world continues to recover from covid. Equity markets in the US and Europe have largely been up for the period whereas China has experienced a bear market while remaining above pre-pandemic levels. Meanwhile, the yield on the 10-Year US Treasury bond slightly increased by nearly 0.66% in the first three months of 2022 from 1.67% to 2.33% along with rising inflation in the United States. Interest rates in China didn’t follow the US and have fallen by 0.10% during the same three-month period.

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

•   Several countries outside the sphere of the conflict may potentially benefit from exporting various commodities like oil and metals.

•   The aftermath of the pandemic still bears signs of E-Commerce penetration continuing to rise across emerging economies along with the digitalization of other economic activities such as health care and financial services.

Emerging Markets Overview (April 1, 2021 to March 31, 2022)

•   Emerging Market equities, as measured by the MSCI Emerging Markets Index, were down for the period, returning -11.37%.

•   The best performing sectors across the Emerging Market equity market included Financials (+12.39%), Utilities (+11.51%), and Materials (+6.95%).

•   The worst performing sectors across the Emerging Market equity market included Health Care (-25.35%), Real Estate (-27.77%), and Consumer Discretionary (-39.42%).

By the Fund’s fiscal year end on March 31, 2022 (the “reporting period”), the NAV of the Fund decreased by -25.77% while the Underlying Index decreased by -25.63%.

At the end of the reporting period, the Fund held 97.66% of the portfolio in the health care sector.

40

 

Management Discussion of Fund Performance (Unaudited) (continued)

KraneShares Emerging Markets Healthcare Index ETF (concluded)

Growth of a $10,000 Investment‡

(at Net Asset Value)‡

AVERAGE TOTAL RETURN FOR THE PERIOD ENDED MARCH 31, 2022*

 

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 Healthcare Index ETF

 

-25.77

%

 

-26.93

%‡

 

4.05

%‡

 

3.85

%‡

 

0.24

%‡

 

0.03

%‡

Solactive Emerging Markets Healthcare Index

 

N/A

 

 

-25.63

%‡

 

N/A

 

 

5.01

%‡

 

N/A

 

 

0.92

%‡

S&P 500 Index

 

N/A

 

 

15.65

%‡

 

N/A

 

 

18.92

%‡

 

N/A

 

 

15.09

%‡

*       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 it more accurately reflects the market value of an ETF share at the time as of which the ETF calculates current NAV per share, the midpoint between the national best bid and national best offer (“NBBO”) as of that time. 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, shares may be worth less than their 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 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.

41

 

Management Discussion of Fund Performance (Unaudited) (continued)

KraneShares MSCI Emerging Markets ex China Index ETF

The KraneShares MSCI Emerging Markets ex China Index ETF (the “Fund”) seeks to provide investment results that, before fees and expenses, correspond generally to the price and yield performance of the MSCI Emerging Markets ex China Index (the “Underlying Index”).

The Underlying Index is a free float-adjusted market capitalization weighted index designed to track the equity market performance of mid- and large-cap companies of emerging market countries, excluding China. The Underlying Index is based on the MSCI Emerging Markets Index (“universe”), but excludes the securities of Chinese issuers.

Emerging Markets Review:

Global equity markets followed an upward trend in the second half of 2021, as the world continued to recover from covid. Equity markets in the US and Europe were largely up for the period whereas China experienced a bear market while remaining above pre-pandemic levels. Meanwhile, the yield on the 10-Year US Treasury bond slightly increased by nearly 0.66% in the first three months of 2022 from 1.67% to 2.33% along with rising inflation in the United States. Interest rates in China didn’t follow the US and have fallen by 0.10% during the same three-month period.

The invasion of Ukraine has stoked fears of inflation, volatility, and uncertainty for emerging markets around the globe. However, several countries, such as Brazil, have benefitted from higher commodity prices, along with South Africa and Saudi Arabia. Looking forward, it is difficult to ascertain the direction emerging markets will take as global supply chains struggle and the potential looms for monetary policy tightening. A rising US dollar is also a risk for emerging markets going forward.

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

•   Several countries outside the sphere of the conflict may potentially benefit from exporting various commodities like oil and metals.

•   The aftermath of the pandemic still bears signs of E-Commerce penetration continuing to rise across emerging economies along with the digitalization of other economic activities such as health care and financial services.

Emerging Markets Overview (April 1, 2021 to March 31, 2022)

•   Emerging Market equities, as measured by the MSCI Emerging Markets Index, were down for the period, returning -11.37%.

•   The best performing sectors across the Emerging Market equity market included Financials (+12.39%), Utilities (+11.51%), and Materials (+6.95%).

•   The worst performing sectors across the Emerging Market equity market included Health Care (-25.35%), Real Estate (-27.77%), and Consumer Discretionary (-39.42%).

By the Fund’s fiscal year end on March 31, 2022 (the “reporting period”), the NAV of the Fund increased by 0.57%, while the Underlying Index increased by 2.07%.

At the end of the reporting period, the Fund held 29.47% of the portfolio in the Information Technology sector, 25.83% in the Financial sector, 11.09% in the Materials, 7.81% in the Energy sector, 7.28% in the Communication Services sector, 5.67% in the Consumer Staples, 4.93% in the Consumer Discretionary sector, 3.71% in the Industrials sector, 1.51% in the Healthcare sector, 1.46% in the Utilities sector, and 1.00% in the Real Estate sector.

42

 

Management Discussion of Fund Performance (Unaudited) (continued)

KraneShares MSCI Emerging Markets ex China Index ETF (concluded)

Growth of a $10,000 Investment‡

(at Net Asset Value)‡

AVERAGE TOTAL RETURN FOR THE PERIOD ENDED MARCH 31, 2022*

 

One Year
Return

 

Annualized
Inception to Date

   

Net Asset
Value

 

Market
Price^

 

Net Asset
Value

 

Market
Price^

KraneShares MSCI Emerging Markets ex China Index ETF

 

0.57

%

 

0.53

%‡

 

9.32

%‡

 

9.37

%‡

MSCI Emerging Markets Ex China Index

 

N/A

 

 

2.07

%‡

 

N/A

 

 

8.36

%‡

S&P 500 Index

 

N/A

 

 

15.65