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ETF Winners & Losers from MSCI Index Review

Sweta Killa

The U.S. index provider MSCI announced its long-awaited decision to include China-A shares to its global equity index and the emerging market index, beginning June 2018. The move marks a major landmark in Beijing’s efforts to draw international money into the world’s second-largest stock market.

The MSCI Emerging Market index will include 222 China-A large-cap shares albeit at a meager 0.73% weight via a two-phase process in May and August next year. Most of the stocks would be from the financial and industrial sectors. Some financial giants will be Bank of China, China Merchants Bank, Guotai Junan and Ping An Insurance while industrial companies will include Tsingtao Brewery, SAIC Motor, Suning Commerce and Spring Airlines (read: What Does the MSCI Inclusion Mean for China A Shares and ETFs?).

Notably, A-Shares are issued by companies headquartered in mainland China and traded on RMB on Shenzhen or Shanghai stock exchanges. These can usually only be purchased by domestic Chinese investors due to high regulation, though some foreign investors can trade through Qualified Foreign Institutional Investors or Renminbi Qualified Foreign Institutional Investors.

As per MSCI executives, the inclusion of domestic Chinese stocks to the emerging market index would add $17-$18 billion of global assets to Chinese stocks initially, and attract more than $340 billion of foreign capital flow into the country over the long term. Additionally, most analysts believe that the move could pull in more than $400 billion of funds from asset managers, pension funds, and insurers into mainland China's equity markets over the next decade.

Separately, MSCI added the possibility of including Saudi Arabia stocks next year to the MSCI Emerging Market index. Saudi Arabia entry into the emerging market index will lead to billions of dollars being injected into the Middle East’s biggest economy. Per HSBC Holdings, the move will likely result in inflows of $9 billion.

Further, the index provider delayed the decision to reclassify Argentina as an emerging market and demote Nigeria to a standalone market status until at least November.

Market Impact

The MSCI decision has led to a rally in Chinese stocks with the CSI 300 Index, comprising the top 300 stocks on both the Shanghai and Shenzhen exchanges, gaining 1.2% to the highest level since December 2015. The Saudi Stock Exchange’s benchmark Tadawul All Share Index also climbed 5.5% — the most since August 2015 (see: all the Broad Emerging Market ETFs here).

On the other hand, Argentina's benchmark Merval stock index slumped 5% on the day while the Nigerian Stock Exchange All-Share Index dropped 2.6%.

Given this, we have highlighted ETFs that have gained and lost on MSCI’s decision and are likely to continue the trend in the near term. Investors should note that China-A shares ETFs have stolen the show.

Deutsche X-trackers Harvest CSI 300 China A-Shares ETF ASHR

This fund tracks the CSI 300 Index and holds a basket of 312 stocks. It is slightly tilted toward the top holding at 5.1% while other securities hold no more than 2.31% of assets. From a sector look, about one-third of the portfolio is allotted to financials, followed by industrials (15%) and consumer discretionary (12%). The fund has amassed $371 million in its asset base and charges 61 bps per year. It gained 1.2% following the MSCI decision on elevated volumes of 1.6 million compared to around 713,000 shares on average. ASHR has a Zacks ETF Rank of 3 or ‘Hold’ rating with a High risk outlook.

KraneShares Bosera MSCI China A ETF KBA

This fund follows the MSCI China A International Index, which measures the performance of large-cap and mid-cap Chinese securities listed on the Shanghai and Shenzhen Stock Exchanges. Holding 434 securities in its basket, it is widely diversified across components with each accounting for less than 3% share. However, the product is slightly skewed toward financials at 32.7% while industrials and consumer discretionary round off the top three with a double-digit exposure each. It has accumulated $143.9 million in its asset base and charges 0.64% in expense ratio. The fund is up 0.9% on elevated volume of two times the normal average and has a Zacks ETF Rank of 3 with a High risk outlook (read: Brazil, China Fail to Snap EM ETFs Rally).

iShares MSCI Saudi Arabia Capped ETF KSA

This fund offers exposure to the Saudi Arabian stock market, which has historically been closed to foreign investors. KSA tracks the MSCI Saudi Arabia IMI 25/50 Index and holds 72 stocks in its basket. It is heavily concentrated on the top two firms with a combined 26.4% share while the other securities hold less than 7.7% of total assets. Further, financials and materials take the top two spots with 37.6% and 32.7% share, respectively, while the other sectors make up for a single-digit allocation each. The fund has a lower level of $11.4 million in AUM and charges 74 bps in annual fees. It surged 6.3% on the day on elevated volume of more than 55,000 compared to under 10,000 shares on average. KSA currently has a Zacks ETF Rank of 4 or ‘Sell rating with a Medium risk outlook.

Global X MSCI Argentina ETF ARGT

This fund offers exposure to the 26 largest and most-liquid Argentine securities by tracking the the MSCI All Argentina 25/50 Index. It is highly concentrated on the top two firms at 34% while the other firms hold no more than 7.05% share. With respect to sectors, energy and technology make up for the largest share at 26% and 25%, respectively, followed by a double-digit exposure each in financials and consumer staples. The fund has managed $177.4 million in its asset base and charges 59 bps in annual fees. It fell 2% on the day due to an elevated volume of 243,000 shares compared with an average of 85,000 shares. ARGT has a Zacks ETF Rank of 4 with a Medium risk outlook (read: Argentina ETF Hits a New 52-Week High).

Global X MSCI Nigeria ETF NGE  

This fund invests in the largest and most liquid companies in Nigeria and follows the MSCI All Nigeria Select 25/50 Index. It holds 21 stocks in its basket with the top three firms dominating the portfolio with 43.5% of assets. Other securities hold no more than 5.11% share. From a sector look, financials take the top spot with 52% share, closely followed by consumer staples at 34%. The product has amassed $59.4 million in its asset base and charges 68 bps in annual fees. It dropped 2.6% on the day and sees volume of 51,000 shares versus daily volume of 42,000 shares. NGE has a Zacks ETF Rank of 5 or ‘Strong Sell’ rating with a High risk outlook.

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DEUTS-XT HV CS3 (ASHR): ETF Research Reports
 
GLBL-X MS NIGRA (NGE): ETF Research Reports
 
GLBL-X MS ARGEN (ARGT): ETF Research Reports
 
KRANS-BOS CHINA (KBA): ETF Research Reports
 
ISHARS-MSCI SA (KSA): ETF Research Reports
 
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