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Closed-End Bond Funds Near Their Deepest Discounts Since 2008

While most of the world’s attention has been on the China market meltdown and the Greek debt showdown, closed-end bond funds have quietly been priced to deliver solid total returns over the next 12-18 months. To take advantage of this pricing, I have carved out an 8%-10% allocation to closed-end bond funds in my Dividend Growth Portfolio . With the Fed’s looming rate hike casting a shadow over the bond market, many high-quality closed-end bond funds are trading at their deepest discounts to NAV since the 2013 “taper tantrum,” and some are approaching levels last seen during the 2008 meltdown. Starting at these levels, I expect a portfolio of closed-end bond funds to deliver total returns (income + capital gains) of 15%-20% over the next 12-18 months. With any closed-end mutual fund, you have only three potential drivers of returns: Current income: Closed-end bond funds generally pay monthly distributions earned from bond interest and stock dividends. Capital appreciation of portfolio: As with any mutual fund or ETF, the underlying portfolio value will rise or fall with market conditions. Change in discount/premium to NAV: Unlike mutual funds or ETFs, the market price of a closed-end fund will trade at a discount or premium to its underlying net asset value (“NAV”). In today’s market, I expect all three of these drivers to work to our benefit. I’ll start with current income. At current prices, many closed-end funds are delivering current yields well in excess of 7% without dipping too heavily into lower-quality junk. These outsized yields are made possible by the discounts to NAV and by the modest amount of leverage the funds use. Capital appreciation of the portfolio is going to depend on the bond market cooperating. Right now, investors are dumping bonds out of fear of the pending “liftoff” of the Fed funds rate. But with inflation still very low and with lower bond yields overseas acting as an anchor, I don’t expect bond yields to rise much from current levels. In fact, I think it’s very likely that bond yields drift modestly lower from here, which would be a boon to closed-end fund pricing. And finally, we get to the discount/premium to NAV. It’s normal for these funds to trade at modest discounts to their NAV. It’s when that discount gets wider (or smaller) than usual that you need to stand up and take note. And today, the discounts are near their widest points in years. (click to enlarge) To better explain what I’m talking about, let’s look at an example. I’ve been buying shares of the Eaton Vance Limited Duration Income Fund (NYSEMKT: EVV ) in recent weeks. EVV owns a portfolio of bonds and bank loans and yields a very respectable 8.9%. Its portfolio has lost value this year as bond yields have crept higher, yet its market price has fallen much faster than its NAV. As a result, EVV is now trading at its deepest discount to NAV in five years: 12.7%. As recently as two years ago, EVV was trading at a 4% premium to NAV. What kind of returns should we expect here? Let’s do a little back-of-the-envelope math. We have the current yield of 8.9%. Assuming no improvement in NAV but that the fund’s discount improves from the current 12.7% to a more reasonable 7%, you’d tack on another 5%-6%. That gets us to just shy of 15% total returns. And if the underlying NAV rallies – and I expect it will – we can get to total returns of 20% pretty quickly. Are those amazing returns to write home about? No. But are they a lot better than what I expect the broader market to deliver over the next 12-18 months? Absolutely. Disclosure: Long EVV. This article first appeared on Sizemore Insights as Closed-End Bond Funds Near Their Deepest Discounts Since 2008 Disclaimer: This article is for informational purposes only and should not be considered specific investment advice or as a solicitation to buy or sell any securities. Sizemore Capital personnel and clients will often have an interest in the securities mentioned. There is risk in any investment in traded securities, and all Sizemore Capital investment strategies have the possibility of loss. Past performance is no guarantee of future results.

Giving Utilities Credit When Tax Credit Is Due

Federal tax credits creates winners. Tax credits can boost utility earnings. Government is not using tax credits to pick losers. Tax credits can be helpful for taxpayers and consumers. Government has limited influence over utilities’ investments. It cannot force investor-owned utilities to build new wind turbines, solar farms, nuclear power or clean coal. However, it can offer incentives and hope utilities will be motivated to build new projects. One powerful incentive is the federal tax credit. For qualifying assets, the federal government allows investor-owned utilities to claim a credit on their income tax. That credit is determined by the asset’s type, condition and age. Federal tax credits come in two flavors. One is an investment tax credit (ITC). The other is a production tax credit (PTC). Normally, assets cannot qualify for both credits at the same time. Tax-exempt utilities, such as municipals and cooperatives, cannot use either. The ITC is a one-time credit offered for new capacity. The amount is a percentage of capital expended. It can only be claimed for qualified equipment after the new facility is fully constructed and only after it produces commercial power (source: 26 USC § 48 ). The federal government assumes no development risk and it assumes no construction risk. Except for initial production, the ITC is not designed to reward investors for energy production. The PTC is an annual credit offered for new energy production. The amount is based on energy produced (source: 26 USC § 45 ). To earn PTCs, utilities not only assume all development and construction risks, they also assume all production risks. If the facility’s production is anemic and underproduces, owners are penalized with reduced PTCs. In some cases, PTC payments may be reduced further if the asset earns above threshold revenues. In addition, PTC payments are limited to the first few years of the asset’s operating life. Unlike ITCs, PTCs are generally indifferent towards the utility’s capital cost. Most existing assets do not qualify for either credit. Wind power plants operating more than ten years do not qualify for tax credits. Solar power plants operating more than five years do not qualify. In addition, there are clawback provisions for assets that change ownership within prescribed periods. The government’s intent is to stimulate new investments. They use tax credits to help utilities reduce their capital expenditures, help small businesses with project financing and help owners reduce operating risks. They also use credits to help investors attract permanent financing. During the recent recession, the government used tax credits to create a temporary incentive that was intended to stimulate large, small and tax-exempt businesses. It was called 1603 and it referred to Section 1603 of American Recovery and Reinvestment Act of 2009 ( Public Law 111-5 ). For a short time, Congress allowed power plants that normally qualified for ITCs or PTCs to earn cash payments in lieu of tax credits. According to a recent US Treasury report , § 1603 performed as intended. It stimulated approximately 99,000 new energy projects with a combined capacity of 31,700 megawatts valued at approximately $84.5 billion (or $2.66 million per megawatt). Notwithstanding, special interests mischaracterize tax credits. Some claim tax credits are a federal giveaway program. Some claim the federal government uses tax credits as a means to pick winners over losers. Some also claim that tax credits intentionally hurt their businesses and help their competitors. There is a thread of truth in most of these claims. However, there are some distortions. Tax credits can be profitable for federal, state and local governments. First, the federal government allows all taxpaying businesses to deduct a number of ordinary expenses, including interest, taxes, depreciation and amortization. In addition to those deductions, qualifying assets may also earn ITCs. However, if a taxpayer earns an ITC, it must reduce their depreciable basis by one-half the value of the ITC. When the reduced depreciation is combined with the credit, the ITC’s net cost to the federal government is zero. In fact, it is less than zero. Second, the Modified Accelerated Cost Recovery System (MACRS) assigns a five-year useful life to solar, wind, geothermal and other property. For solar, wind and geothermal assets, there are no fuel costs. After five years, owners have no depreciation expenses. With no fuel costs or depreciation expense, utilities may find their asset generating revenues at the maximum federal income tax bracket for the remaining life of that asset (typically 15 to 20 more years). Consequently, the federal government can expect to receive at least some of their tax credit money returned. In some cases, as in ITC-earning utility-grade solar, they can expect to see all of it returned. Federal tax credits also produce new local, state and payroll taxes. If utilities had done nothing and not built new assets, state and local governments would earn no new taxes. With new assets appearing, state and local government have a new tax base that cost them nothing. Consequently, federal tax credits benefit state and local governments directly. When those benefits are added, the returns on federal investments become positive. There is more. Tax credits produce other economic benefits, some tangible and others intangible. Some tangible benefits include reduced energy costs, reduced taxes and increased economic development. Intangible benefits include improve system reliability, increased energy independence and improved energy security. Adding direct and indirect benefits and improving the federal, state and local tax base, tax credits appear to represent a solid investment. Another distortion is the argument that the federal government uses tax credits to pick winners over losers. It is true government is picking winners. However, their picks are not what some critics would have us believe. To illustrate the point, look at Exelon (NYSE: EXC ). Exelon owns the nation’s largest fleet of commercial nuclear power plants. When originally built, every one of those plants received government guarantees. Those guarantees amounted to tens of billions of dollars, all of which have all been previously consumed. Notwithstanding, Exelon and their Washington-based lobbying group (Nuclear Energy Institute) are upset about PTCs. They have been aggressively lobbying the US Congress to kill the PTC for wind turbines. Their argument is found on Exelon’s website , which claims: “The federal wind energy production tax credit is a prime example of the negative consequences of subsidies through which the government picks energy technology winners and losers.” It is an incredible statement. It turns out; the nuclear power industry is also granted PTCs (source: 26 U.S. Code § 45J ). In fact, nuclear-PTCs are designed to look very much like wind-PTCs. While wind-PTCs are set to expire, nuclear-PTCs are available today and tomorrow. In fact, two utilities plan to use those credits to help them finance their new nuclear construction projects. Southern Company (NYSE: SO ) expects to earn $2 billion worth of nuclear-PTCs. They, and their non-profit partners, are building a two-unit new nuclear power plant in Georgia. Their expected investment is approximately $15 billion. Their first unit is expected to enter commercial operations in 2019. Their second unit is scheduled to enter service in 2020. After each unit begins to produce power, they will be eligible to earn approximately $125 million per year in tax credits for eight years. For both units, Southern can expect to book approximately $2 billion in nuclear-PTCs. SCANA (NYSE: SCG ) also expects to earn nuclear-PTCs. Like Southern, SCANA and their non-profit partner, are building new nuclear units in South Carolina. They are using the same technology, similar contractors, similar budgets and similar schedules as Southern. They also expect to earn $2 billion in nuclear-PTCs after their units enter commercial operations. Considering the $4 billion in nuclear-PTCs allocated for Southern and SCANA, Exelon’s complaint appears confused. On the one hand, we have the nuclear industry complaining about wind-PTCs; on the other hand, we have the very same industry planning to book $4 billion in nuclear-PTCs. At the same time, the nuclear industry is complaining about the government picking winners, it appears they want the government to pick winners. The difference is Exelon wants the government to pick their assets as the winner and, conveniently, they want their competitors’ assets to be designated as the loser. While it appears the federal government likes new nuclear, new solar, new wind and new geothermal, they must hate coal. It turns out; they don’t. Like new nuclear units, the coal industry gets to play in the tax credit game. Utilities building new coal-burning power plants qualify for tax credits (source: 26 U.S. Code § 48A ). Unlike nuclear-PTCs, new coal burners earn ITCs. For example, the government offers a 20 percent ITC for coal projects using integrated gasification combined cycle technology (IGCC) and a 15 percent ITC for other advanced projects. Like all other power producers, coal-burning assets must qualify their assets in order to claim their tax credits. It appears coal-ITCs offered enough incentive for Southern and several other utilities to build new coal facilities. Southern has been building a next-generation IGCC in Kemper County, Mississippi. Unfortunately, Southern took too long to finish their project. Those delays forced Southern to disqualify Kemper for ITC purposes under current tax rules. Consequently, Southern lost $133 million in tax credits . The lesson learned from Southern’s Kemper experience is to count your chickens after they hatch, not before. Specifically, tax credits are not earned until all construction work is completed and the plant is producing power. If a utility booked a tax credit before the project is completed, they could find that tax credit recalled and siezed. There are other lessons. It is true; the government is using tax credits to pick winners. Those winners include new investments in almost everything, including coal, nuclear, wind, solar and other power technologies. The government is not using tax credits to pick losers, but they are ignoring gas turbines and depreciated assets. Those older assets consumed all manner of government incentives years ago. In fact, some of those older assets received higher levels of state government assistance than and new solar, wind or efficiency projects could ever expect. Tax credits do not work everywhere. Most of the nation’s 3,000+ utilities are municipal and cooperative utilities, which are normally tax exempt. To provide broader incentives, the federal government created other tools, which include grants, loan guarantees and public-private partnerships. And yes, it is possible for utilities to simultaneously secure federal loan guarantees, a state guarantees and federal tax credits for a single asset. The federal government offers carrots to utilities. They also keep sticks in their back pocket. The Environmental Protection Agency, the Nuclear Regulatory Commission, the Federal Energy Regulatory Commission, the Securities and Exchange Commission and the Internal Revenue Service all limit utility investments and operations. For utility investors, consumers and those relying on nation’s infrastructure, a balance favoring carrots is needed. When looking at utility financial statements, consider the impact of tax credits and related depreciation schedules. Those incentives affect earnings, balance sheets and cash flows in positive ways. As we saw with Southern’s Kemper project, premature declarations can be clawed back. For shareholders, utilities’ strategic investments in targeted areas can be profitable. It can also be profitable for states, consumers and taxpayers. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: Feel free to edit for clarity and readability. Constructive criticism is always appreciated

The Facts On China’s June Correction

Summary China’s onshore markets experienced a pullback in June. The underlying factors that caused the onshore markets to rise are still intact. The government has met the pullback with a powerful intervention. July 16, 2015 – A strong stock market benefits China’s key policy goals: Renminbi, RMB, internationalization, increased domestic consumption, and unlocking shareholder value in state owned enterprises. The markets’ more prominent role in helping China achieve these goals is one explanation for the rise in the onshore markets, which are up 110% over the past year1. Due to this increased emphasis, China met the recent pullback with a powerful intervention. The cause of the pullback and the Chinese government’s actions to contain it can be confusing to investors outside of China. In this piece we provide an up to date overview of the onshore markets and outline why we believe China is still an attractive investment opportunity. Recent Events Stock investing in China is still a new concept and the majority of Chinese households have less money in the markets than those in the United States. Market exposure on a household basis has yet to be institutionalized in China like it is in the U.S., for instance there are no 401k plans in onshore China, thus the market’s drop adversely effects a smaller subset of the population in China than it would in the United States. In the U.S. the savings rate is 5.1%2 with 25% of net worth going into the markets3. In China the savings rate is an impressive 50%4, however, according to China economic research firm PRC Macro, the average household only has 4.4% of their net worth5 invested in the stock market. Based on this comparison, China’s household participation in the stock market compared to its savings rate is relatively low. China’s leadership understands this disparity and has encouraged its people to invest in the capital markets to bring their participation rates up to par with developed nations and to institutionalize the market. This trend is apt to continue in the years to come, which could act as tailwind for investors. Reasons for the June pullback With such a massive influx of investors into the markets as China is currently experiencing, there is bound to be some measure of volatility. The adoption of margin by investors with little stock market experience struck us as imprudent. We believe overextension of margin was the primary cause of the June pullback. Individual retail investors, who represent 85%7 of the market in onshore China, invested heavily in small cap stocks. These individuals bought on margin, leveraging their capital to cover the costs. Before the decrease in Chinese stock prices in June, brokerage margin increased as the onshore market performed well over the last year. In addition, as the markets continued to grow, the use of over the counter, OTC, margin increased. OTC margin is money leant by non-brokerage firms outside of the regulated markets and, in the case of China, allowed leverage upwards of three to five times the money deposited. While it is difficult to gauge exactly how much OTC margin was in the markets at their peak, between the months of March and May of 2015, it is estimated to have been between 1.5 and 2 trillion RMB8. When a large number of Initial Public Offerings,IPOs, and secondary offerings took place in June, Chinese investors started selling their small cap shares in order to invest in the IPOs. As a result, supply overwhelmed demand and triggered a cascade of selling that led to a significant amount of margin calls. A margin call occurs when a broker asks for more capital from an investor to cover a decrease in value of a stock. Halted and Suspended Securities In order to prevent large numbers of investors from being forced to sell due to compounding margin calls, regulators took the unprecedented measure of allowing companies, particularly small cap companies, to voluntarily halt trading in their stocks. The regulators realized that OTC margin, which is outside the scope of their regulatory purview, had the potential to be a systematic threat to the stock market. While stocks halted, regulators could deleverage both brokerage and OTC margin accounts. OTC margin has fallen 66% in the last several weeks alone due to this effort.9 Our partners in onshore China have reported that the OTC margin business has been largely shut down. While many press reports highlighted the number of stocks halted they failed to show the size of these companies. According to Bloomberg, As of July 15’s close in China the number was 10. 75% (2,211 stocks) are trading, which is 88% of the 6.5 trillion total market cap for the 2951 stocks listed in the onshore exchanges. 4% (132) are suspended, representing 4% of market cap. 18% (540) are halted, representing 8% of the market cap 2% (68) are inactive, representing 0% of the market cap; these companies were scheduled to have initial public offerings but had their IPOs suspended due to a moratorium on new IPOs. Our portfolios hold predominantly large cap stocks and some mid-cap stocks. Media reports on halted stocks were correct in the number of stocks halted, however, they failed to note the majority of these halts were small or micro cap stocks. Valuations We previously stated that we believe investors should avoid small cap stocks due to high valuations. Even today the ChiNext stocks, a segment of the Shenzhen Stock Exchange that represents small cap growth companies, are two standard deviations11 above their average price-to-equity,P/E12 of 55 at 86, though down from their June 3 high of 14713. The MSCI China A International Index currently have a forward P/E of 15 while the combined Shanghai and Shenzhen Composite has a P/E of 17 versus its ten-year average of 1915. Where do we go from here? While not of the same magnitude as 2008, there are parallels between China’s recent correction and the U.S. housing crisis. In both cases, standards amongst lenders varied and in many cases decreased over time. Just as no document home mortgages in the U.S. were allowed despite rational thinking, retail investors in onshore China were able to obtain questionable amounts of leverage. Ultimately the U.S. housing market fell and regulators instituted new standards. In China regulators are instituting new policies prohibiting OTC margin. We hope means based testing for the use of margin at brokerage houses is also instituted. Much like how the U.S. housing crisis and subsequent recovery affected certain geographic areas more than other areas, China’s stock market is not apt to see a uniform rise. We believe investors should continue to underweight small cap securities due to high valuations and instead favor large cap stocks, which have returned to their historical average valuations15. We believe China will continue to pursue policies that aid its ascent as a global economic power. China is focused on increasing global competitiveness of State Owned Enterprises, we believe these stocks have potential to continue to perform well. Between China’s continued development policies and MSCI’s forthcoming inclusion of onshore equities, we believe investors should seek greater exposure to onshore China. As China evolves from being a retail market dominated by individual investors to an institutional oriented market like that of the United States we believe its markets may continue to grow and perform well. 1 Data based on MSCI China A International Index as of 7/14/15. 2 Data from World Bank as of 2013. Savings rate: The amount of money, expressed as a percentage or ratio, that one deducts from his/her disposable personal income to set aside as a nest egg or for retirement. 3 U.S. Federal Reserve. “Financial Accounts of the United States: Flow of Funds, Balance Sheets, and Integrated Macroeconomic Accounts” June 11, 2015. 4 Data from World Bank as of 2013. 5 Data from PRC Macro as of 4/28/2015. 6 Margin: The purchase of an asset by paying the margin and borrowing the balance from a bank or broker. Buying on margin refers to the initial or down payment made to the broker for the asset being purchased. The collateral for the funds being borrowed is the marginable securities in the investor’s account. Before buying on margin, an investor needs to open a margin account with the broker. 7 Data from the Shanghai Stock Exchange as of 2012 8 Ai Jingwei. “OTC how to raise capital with the stock market”, Sina Finance, 7/14/2015. 9 Percent change calculated from data reported by Sina Finance (source 7) and People’s Daily, “From The CSRC: The Amount of Off-Balance Sheet Lending is Close to 500 Billion, 15 Billion Forced to Close Shop”, People’s Daily, 6/30/2015. Previous amount of margin was approximately 1.5 trillion RMB between March to May 2015 according to Sina Finance. The current amount of margin is now 0.5 trillion RMB as of 6/30/2015 according to People’s Daily. 10 Data from Bloomberg as of 7/15/2015. 11 Standard Deviation: A measure of the dispersion of a set of data from its mean. The more spread apart the data, the higher the deviation. Standard deviation is calculated as the square root of variance. 12 Price-to-equity: A ratio used to compare a stock’s market value to its book value. It is calculated by dividing the current closing price of the stock by the latest quarter’s book value per share. 13 Data from Bloomberg as of 7/14/2015. 14 Data from Bloomberg as of 7/14/2015. 15 Data from Bloomberg as of 7/14/2015. Disclosure: I am/we are long KBA, KEMP, KWEB, KFYP. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: ©2015 KraneShares Carefully consider the Funds’ investment objectives, risk factors, charges and expenses before investing. This and additional information can be found in the Funds’ prospectus, which may be obtained here: KBA, KFYP, KWEB, KCNY, KEMP Read the prospectus carefully before investing. Investing involves risk, including possible loss of principal. There can be no assurance that a Fund will achieve its stated objectives. The Funds focus their investments primarily with Chinese issuers and issuers with economic ties to China. The Funds are subject to political, social or economic instability within China which may cause decline in value. Fluctuations in currency of foreign countries may have an adverse effect to domestic currency values. Emerging markets involve heightened risk related to the same factors as well as increase volatility and lower trading volume. Current and future holdings are subject to risk. Narrowly focused investments and investments in smaller companies typically exhibit higher volatility. Internet companies are subject to rapid changes in technology, worldwide competition, rapid obsolescence of products and services, loss of patent protections, evolving industry standards and frequent new product productions. Such changes may have an adverse impact on performance. The ability of the KraneShares Bosera MSCI China A ETF to achieve its investment objective is dependent on the continuous availability of A Shares and the ability to obtain, if necessary, additional A Shares quota. If the Fund is unable to obtain sufficient exposure due to the limited availability of A Share quota, the Fund could seek exposure to the component securities of the Underlying Index by investing in depositary receipts. The Fund may, in some cases, also invest in Hong Kong listed versions of the component securities and B Shares issued by the same companies that issue A Shares in the Underlying Index. The Fund may also use derivatives or invest in ETFs that provide comparable exposures. The ability of the KraneShares FTSE Emerging Markets Plus ETF to achieve its investment objective is dependent, in part, on the continuous availability of A Shares through the Fund’s investment in the KraneShares Bosera MSCI China A Share ETF and that fund’s continued access to the China A Shares market. If such access is lost or becomes inadequate to meet its investment needs, it may have a material adverse effect on the ability of the Fund to achieve its investment objective because shares of the KraneShares Bosera MSCI China A Share ETF may no longer be available for investment by the Fund, may trade at a premium to NAV, or may no longer be a suitable investment for the Fund. The KraneShares FTSE Emerging Markets Plus ETF and KraneShares Bosera MSCI China A Share ETF may be concentrated in the financial services sector. Those companies may be adversely impacted by many factors, including, government regulations, economic conditions, credit rating downgrades, changes in interest rates, and decreased liquidity in credit markets. This sector has experienced significant losses in the recent past, and the impact of more stringent capital requirements and of recent or future regulation on any individual financial company or on the sector as a whole cannot be predicted. These ETFs may also invest in derivatives. Investments in derivatives, including swap contracts and index futures in particular, may pose risks in addition to those associated with investing directly in securities or other investments, including illiquidity of the derivatives, imperfect correlations with underlying investments, lack of availability and counterparty risk. The use of swap agreements entails certain risks, which may be different from, and possibly greater than, the risks associated with investing directly in the underlying asset. The KraneShares E Fund China Commercial Paper ETF is subject to interest rate risk, which is the chance that bonds will decline in value as interest rates rise. It is also subject to income risk, call risk, credit risk, and Chinese credit rating risks. The components of the securities held by the Fund will be rated by Chinese credit rating agencies, which may use different criteria and methodology than U.S. entities or international credit rating agencies. The Fund may invest in high yield and unrated securities, whose prices are generally more sensitive to adverse economic changes. As such, their prices may be more volatile. The Fund is subject to industry concentration risk and is nondiversified. The KraneShares E Fund China Commercial paper ETF invests in sovereign and quasi-sovereign debt. Investments in sovereign and quasi-sovereign debt securities involve special risks, including the availability of sufficient foreign exchange on the date a payment is due, the relative size of the debt service burden to the economy as a whole, and the government debtor’s policy towards the International Monetary Fund and the political constraints to which a government debtor may be subject. In order to qualify for the favorable tax treatment generally available to regulated investment companies, the Fund must satisfy certain income and asset diversification requirements each year. If the Fund were to fail to qualify as a regulated investment company, it would be taxed in the same manner as an ordinary corporation, and distributions to its shareholders would not be deductible by the Fund in computing its taxable income. Narrowly focused investments typically exhibit higher volatility. Internet companies are subject to rapid changes in technology, worldwide competition, rapid obsolescence of products and services, loss of patent protections, evolving industry standards and frequent new product productions. Such changes may have an adverse impact on performance. The KraneShares ETFs are distributed by SEI Investments Distribution Company, 1 Freedom Valley Drive, Oaks, PA 19456, which is not affiliated with Krane Funds Advisors, LLC, the Investment Adviser for the Fund.