Move to EM Index Could Benefit A-Shares ETFs

ETF Trends

Index provider MSCI (MSCI) said earlier this week it is in the consulting stages on the potential inclusion of Chinese A-shares equities in the MSCI Emerging Markets Index.

MSCI expects to make a decision on including A-shares in the MSCI Emerging Markets Index, to which $1.3 trillion in global assets are benchmarked, when it announces its annual market classification in June. If MSCI decides to elevate A-shares, which trade in Shanghai and Shenzhen, to the emerging markets index, the news could be a boon for the new crop of U.S.-listed A-shares exchange traded funds.

The proposal to include equities traded on China’s mainland in the MSCI Emerging Markets Index could lure $4.4 billion in capital, Weiyi Lim reports for Bloomberg. Bloomberg identified Chinese banking giants China Merchants and Agricultural Bank of China as among the prime beneficiaries of a positive decision from MSCI. http://www.bloomberg.com/news/2014-03-13/msci-s-china-index-proposal-seen-luring-4-billion-to-a-shares.html

Increased purchases of A-shares by institutional investors that need to bring their funds and portfolios in line with a new look emerging markets index could lift ETFs such as the db X-trackers Harvest CSI 300 China A-Shares Fund (ASHR) , Market Vectors China ETF (PEK) and the newly minted KraneShares Bosera MSCI China A ETF (KBA) . The PowerShares China A-Share Portfolio (CHNA) also offers A-shares, but via derivatives whereas the aforementioned ETFs have obtained Renminbi Qualified Foreign Institutional Investor (RQFII), allowing the funds to directly own A-shares. [A-Shares ETFs Allow Increased Access to China]

Assuming Chinese banks do in fact benefit from the inclusion of A-shares in the MSCI index, ASHR an KBA, among others, stand to benefit as well. ASHR allocates almost 40% of its weight to the financial services sector, according to Deutsche Bank data.

KBA, which tracks the MSCI China Index, allocates nearly a third of its weight to financials and China Merchants is the new ETF’s largest holding.

MSCI’s inclusion of A-shares in the emerging markets index would be gradual, starting with 5% in 2015, according to the index provider. That would boost China’s weight in the index to 19.9% from the current level of 18.9% and if the country decides to fully liberalize its financial markets, it could account for 27.7% of the MSCI Emerging Markets Index.

As of March 12, China is the largest country weight in the iShares MSCI Emerging Markets ETF (EEM) at 18.4%, 240 basis points ahead of second place South Korea, according to iShares data.

db X-trackers Harvest CSI 300 China A-Shares Fund

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Tom Lydon’s clients own shares of EEM.

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