MSCI (NYSE: MSCI), one of the largest providers of indexes for use by exchange traded funds, will allow some companies with primary stock market listings outside of their home domiciles into the firm’s equity indexes, paving the way for Chinese Internet darlings Alibaba (NYSE: BABA) and Baidu (NasdaqGS: BIDU) to join some well-known ETFs.
Prior to Alibaba’s September 2014 initial public offering, MSCI said the Chinese e-commerce giant would not be eligible to join MSCI indexes because of the company’s decision to primarily list in New York while incorporating in the Cayman Islands.
“MSCI has analyzed the country classification of Alibaba Group Holding. Based on current information, the company will be incorporated in Cayman Islands, it will file 20-F only and it will list in the US only, through American Depositary Shares (ADS). Consequently, based on the above and as per the Appendix III of the MSCI GIMI Methodology Book, the company is not eligible for inclusion in the MSCI Global Investable Market Indexes (GIMI),” said the index provider last July. [Alibaba to Miss Out on MSCI Indexes]
Several days prior to Alibaba’s IPO, MSCI was considering rules changes for its indices that could allow for the inclusion of companies such as Alibaba and Baidu in its global benchmarks. [MSCI Could Add Alibaba]
“MSCI will enhance the coverage of the MSCI GIMI by considering companies traded outside of the country of classification (i.e.,“foreign listed companies”) as eligible for inclusion in the MSCI GIMI. Foreign listed companies would be eligible for the MSCI Country Indexes where they would represent a material proportion of the index market capitalization,” said MSCI in a statement.
Alibaba and Baidu can move into MSCI indexes as part of MSCI’s November 2015 annual review, giving those companies avenues for joining major ETFs such as the iShares MSCI Emerging Markets ETF (NYSEArca: EEM), the second-largest emerging markets ETF by assets. EEM, home to $32.1 billion in assets under management, allocates 22.1% of its weight to Chinese companies, including a 2.2% weight to Tencent (OTC: TCEHY), a rival to Alibaba and Baidu.
MSCI’s decision also opens the door for Alibaba and Baidu to join ETFs such as the $6.7 billion iShares MSCI ACWI ETF (NasdaqGM: ACWI) and the $1.3 billion iShares MSCI China ETF (NYSEArca: MCHI). Scores of other ETFs benchmarked to MSCI indexes could also include Alibaba and Baidu. At the end of last year, there was nearly $2.8 trillion in assets allocated to exchange traded products worldwide with 13.5% devoted to products using MSCI indexes, according to ETF research firm ETFGI.