In most instances, investors are not rewarded for keeping large amounts of cash on the sidelines. The Federal Reserve has seen to that with its zero interest rate policy and even if the Fed does raise rates next year, U.S. interest rates will still be low by historical standards.
That means any Fed rate hike, whenever it finally arrives, will have only a negligible impact on cash instruments such as money markets. However, there are ways investors can deal with this scenario.
Although the newly minted KraneShares E Fund China Commercial Paper ETF (NYSEArca: KCNY) is not a typical cash-stashing avenue, there are compelling reasons why KCNY merits consideration by investors looking to earn something beyond a penance on cash kept in their brokerage accounts.
KCNY, the first Chinese commercial paper ETF to list in the U.S., features an average maturity of just 128 days and a lineup comprised entirely of investment-grade holdings and tracks the CSI Diversified High Grade Commercial Paper Unhedged Index. [Nifty New China Bond ETF]
“Unlike here in the US (and around most developed countries), Chinese investors actually get a return on their money market funds. As a possible solution for the near zero-yield returns that US investors are seeing on their cash, Kraneshares launched the first-ever commercial paper ETF under the ticker symbol KCNY on the NYSE. It’s a highly unique product that requires some due diligence to understand, of course, and it may not be for everyone,” according to The Reformed Broker, Josh Brown.
Look at KCNY this way: An investor that has cash sitting in a Merrill Lynch or TD Ameritrade Account earns 0.01% in interest, but Chinese money markets have delivered 4.9% over the past year, according to KraneShares.
“China’s high money market fund returns are driven from the country’s high risk free rate. China’s yield curve is also very flat and delivers attractive yields relative to US treasuries. A 3mo China government bond delivers 3.39% vs a 3mo US government bond at 0.01%…that’s a 3.38% spread,” KraneShares said on The Reformed Broker.
Investors are already noticing the advantages of KCNY over the traditional U.S. brokerage sweep program that is only moderately more rewarding than the free lollipops at the local bank branch. KCNY debuted earlier this month and already has over $22.4 million in assets under management. [Good Timing for These New ETFs]
The ChinaBond Commercial Paper Index is up nearly 38% over the past five years compared to a gain of just 1.55% for the S&P US Commercial Paper Index. As the chart below indicates, investors can harness KCNY’s yield advantage without fear of significant downside deviations.
Chart Courtesy: KraneShares