As macroeconomic conditions and geopolitical dynamics continue to evolve, currency markets have become an increasingly important driver of investment outcomes. Diverging interest rate cycles, shifting growth expectations, and periods of geopolitical uncertainty have all contributed to more pronounced currency movements in recent years. For European investors, this means that foreign exchange exposure can potentially influence returns, sometimes as much as the underlying assets themselves.

Against this backdrop, KraneShares recently expanded its flagship China ETF offering with EUR-hedged and GBP-hedged share classes of the KraneShares CSI China Internet UCITS ETF (KWEB) listed on the London Stock Exchange. The objective is straightforward: to give investors more precise access to China’s internet technology and artificial intelligence (AI) sector while aiming to reduce the impact of fluctuations in the US dollar.

Accessing China’s Digital Economy

The China ETF tracks the CSI Overseas China Internet Index, which consists of China based companies whose primary business or businesses are focused on internet and internet-related technology. Key holdings include companies such as Alibaba, Tencent, Baidu, and Meituan which are increasingly central to China’s technological development and AI ecosystem.

While the underlying businesses generate revenues primarily linked to China’s domestic economy, their listings introduce an additional layer of currency complexity. Securities are often priced in Hong Kong dollars or US dollars, while the ETF itself operates in USD. For European investors, this creates indirect exposure to multiple currencies, even when the underlying investment thesis is focused on China’s structural growth.

Understanding Currency Exposure in KWEB

From a European investor’s perspective, an investment in KWEB typically involves several overlapping currency layers:

Exposure Layer	Currency
Investor base currency	EUR or GBP
ETF base currency	USD
Underlying listings	USD or HKD
Economic exposure of businesses	RMB/CNY

Because the Hong Kong dollar is pegged to the US dollar within a narrow trading band, USD exposure can become the dominant source of foreign exchange volatility for European investors. The new hedged share classes aim to simplify this exposure profile.

The Role of Base Currency Share Classes

KWEB already offers EUR- and GBP-denominated share classes, with tickers KWBE (EUR) and KWBP (GBP). These allow investors to buy and sell the China ETF in their local currency, which can simplify trading and reduce operational friction.

However, it is important to recognise that these share classes do not alter the underlying currency exposure. They change the currency of transaction, not the currency risk embedded in the investment.

A EUR investor in KWBE or a GBP investor in KWBP remains fully exposed to movements in the US dollar. If the dollar weakens against the euro or pound, returns in local currency terms may be reduced, even if the underlying equities perform strongly.

Introducing Currency-Hedged Share Classes

The newly launched EUR- and GBP-hedged share classes aims to address this specific issue. Rather than leaving USD exposure unhedged, these share classes seek to minimise its impact through a systematic hedging process.

The approach used is known as a NAV hedge. Instead of hedging each individual currency exposure within the portfolio, the hedge is applied at the level of the ETF’s USD-denominated Net Asset Value (NAV). This is implemented using exchange-traded currency futures, which provide a liquid and transparent mechanism for managing foreign exchange risk.

This structure is particularly well suited to KWEB. Although the underlying companies generate revenues in renminbi (RMB), the portfolio’s market exposure – through USD and HKD listings – means that its currency behaviour is closely aligned with the US dollar. Hedging USD exposure therefore addresses some of the relevant currency risk for European investors.

How the Hedge Works in Practice

To illustrate the difference between unhedged and hedged share classes, consider a EUR-based investor.

The ETF manager uses currency futures to hedge USD exposure back into euros in the EUR-hedged share class. These positions are maintained and rolled over time to ensure the hedge remains aligned with the value of the share class.

Now consider a scenario in which the underlying China internet equities rise by 10%, but the US dollar weakens by 5% against the euro.

An investor in the unhedged EUR share class (KWBE) would experience both effects. The equity gain would be partially offset by the weaker dollar, resulting in a return of approximately 5% in EUR terms.

By contrast, an investor in the EUR-hedged share class would see a different outcome. While the equities still deliver a 10% return, the decline in the US dollar is offset by gains on the currency futures hedge. The result is a return closer to 10% in EUR terms, reflecting more directly the performance of the underlying equities.

Why This Matters for Investors

This distinction highlights the different roles played by base currency and hedged share classes. The former improves accessibility by allowing investors to transact in their preferred currency, while the latter actively manages currency exposure to reduce its impact on returns.

For investors allocating to China’s internet sector, this can be particularly relevant. Many are seeking exposure to long-term structural trends such as digital consumption, platform economics, and advances in artificial intelligence. In this context, currency fluctuations, especially those driven by macroeconomic factors unrelated to China, may introduce an additional source of volatility that is not central to the investment thesis.

By reducing USD-related currency movements, hedged share classes aim to provide a more direct link between portfolio performance and the underlying growth of China’s digital economy.

Aligning with Evolving Investor Needs

The introduction of EUR- and GBP-hedged share classes reflects a broader evolution in the European ETF market. Investors are increasingly focused on controlling currency exposure as part of portfolio construction, rather than treating it as an incidental outcome of global investing.

At the same time, interest in China’s technology sector continues to grow, driven by innovation in areas such as e-commerce, fintech, and artificial intelligence.

By expanding the KWEB UCITS ETF range to include currency-hedged options, KraneShares is responding to both trends. The result is a more flexible toolkit that allows investors to tailor their exposure, not only to a specific sector and geography, but also to the currency dynamics that shape their returns.

A More Targeted Allocation

Ultimately, the addition of EUR- and GBP-hedged share classes is about improving precision. For investors who want their returns to reflect developments in China’s internet sector rather than movements in the US dollar, these share classes provide a focused solution.

As global investing continues to evolve, such distinctions are becoming increasingly important. For European investors accessing China’s innovation economy through KWEB, hedged share classes may provide a more efficient and targeted way to express that view.

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For KWEB standard performance, top 10 holdings, risks, and other fund information, please click here.

This is a marketing communication. Please refer to the UCITS Prospectus, the KIID, and the PRIIP before making any final investment decision.

The Class EUR Hedged shares and Class GBP Hedged shared are Currency Hedged Share Classes (as defined in the prospectus). The Fund may use FDI for the purposes of hedging the foreign exchange risk of these classes, including forward foreign exchange contracts, foreign exchange futures and foreign exchange swaps. This hedging seeks to minimise the effect of exchange rate fluctuations between the base currency (USD) and the relevant share class currency. Where the hedge is applied successfully, the performance of the hedged class is likely to move in line with the performance of the share classes denominated in the base currency. The use of this hedging may substantially limit holders of the relevant class from benefiting if the class currency decreases in value relative to the base currency. Further details are set out in the “Currency Hedging at Share Class Level” section of the prospectus and the “Currency Hedging” section of the supplement for the Fund.

Definitions:

American Depositary Receipts (ADRs): certificates issued by US banks used to facilitate trading of foreign securities on US exchanges.

NAV Hedge: This type of hedging seeks to minimise the effect of exchange rate fluctuations between the Base Currency and the class currency of the Currency Hedged Share Class. It is typically used when most portfolio holdings are either denominated in, or hedged back to, the Base Currency. Where such hedging is undertaken, the class currency of the Currency Hedged Share Class is systematically hedged to the Base Currency. Where the NAV Hedge is applied successfully in respect of a Currency Hedged Share Class, the performance of the Currency Hedged Share Class is likely to move in line with the performance of the Share Classes denominated in the Base Currency.

Portfolio Hedge: This type of hedging seeks to minimise the effect of exchange rate fluctuations between the currency exposures of the portfolio holdings and the class currency of the Currency Hedged Share Class. It is typically used when most of the portfolio holdings are neither denominated in, nor hedged back to, the Base Currency. Where such hedging is undertaken, the currency exposures of the assets of the Sub-Fund are systematically hedged back to the class currency of the Currency Hedged Share Class in proportion to the Currency Hedged Share Class’ share of the Net Asset Value of the Sub-Fund, unless for specific currencies, it is impractical or not cost effective to apply the Portfolio Hedge.