Move to EM Index Could Benefit A-Shares ETFs

Index provider MSCI (NYSE: 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 (NYSEArca: ASHR), Market Vectors China ETF (NYSEArca: PEK) and the newly minted KraneShares Bosera MSCI China A ETF (NYSEArca: KBA). The PowerShares China A-Share Portfolio (NYSEArca: 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.