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.
Earlier this month, MSCI rival FTSE said it commenced initial studies into the possibility of including companies with primary listings outside of their home domiciles in FTSE indices. FTSE currently excludes Alibaba and Baidu from well-known ETFs such as the Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO), the largest emerging markets ETF by assets, and the iShares China Large-Cap ETF (NYSEArca: FXI). [Alibaba, Baidu Could Join FTSE Indices]
S&P Dow Jones was the first of the major index providers to allow for the inclusion of Alibaba in its global benchmarks. The index provider made that announcement prior to the Alibaba IPO and the stock has since appeared in ETFs that track S&P indices such as the SPDR S&P China ETF (NYSEArca: GXC), one of the largest U.S.-listed China ETFs.
ETFs that currently feature notable weights to Alibaba include the Guggenheim China Technology ETF (NYSEArca: CQQQ), which added the stock a month ago, the KraneShares CSI China Internet Fund (NasdaqGM: KWEB) and the Renaissance IPO ETF (NYSEArca: IPO). IPO was the second U.S. ETF to add Alibaba after the company’s IPO.
iShares MSCI Emerging Markets ETF
Tom Lydon’s clients own shares of EEM. Todd Shriber owns shares of Alibaba.