Shanghai and Shenzhen, home to the bulk of trading in China’s A-shares equities, are two of the world’s largest equity markets, but despite that heft and investors’ growing desire to access A-shares, China’s onshore equities have been kept out of traditional emerging markets exchange traded funds.
A new ETF changes that. The KraneShares FTSE Emerging Markets Plus ETF (BATS:KEMP), which debuted Monday, is the first diversified emerging markets ETF that includes China’s A-shares. The KraneShares FTSE Emerging Markets Plus ETF also features exposure to China N-shares.
Despite the growing importance of China’s A-shares market, it has not been promoted to major emerging markets indices by index providers. In 2014, FTSE, MSCI and Standard & Poor’s all declined to elevate China A-shares to emerging markets status. A-shares remains on the watch lists of FTSE and MSCI for possible promotion to emerging markets territory. Last June, FTSE introduced a series of indices that will allow market participants to include China A-shares in global indices at a time of their choosing. [The Case for A-Shares Allocations]
KEMP, the newest KraneShares ETF, tracks the FTSE Emerging GDP Weighted index. The GDP-weighted index is a combination of securities from three different underlying index series:The FTSE Emerging Index, part of the FTSE Global Equity Index Series, FTSE China A Index, including A-shares and the FTSE China Overseas Index, including N-shares and S-chips, according to FTSE.
“In addition, the new index is adjusted by GDP to reflect the performance of constituent companies where country weightings are proportionate to the country’s forecast GDP. The methodology uses the five year GDP forecasts at Purchasing Power Parity (PPP) published by the International Monetary Fund (IMF) to determine the country weightings,” according to the index provider.
By including China A- and N-shares, KEMP has a 48.1% weight to Chinese stocks, according to KraneShares data. That is nearly double the weight to China found in the Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO). VWO, the largest emerging markets ETF by assets, also benchmarks to a FTSE index. As of Dec. 19, 2014, China ETFs tracking FTSE indexes had over $24 billion in combined assets under management.
Not only is KEMP the first U.S.-listed diversified emerging markets ETF to feature China A-shares, it is the first ETF to purchase those equities through the recently launched Shanghai-Hong Kong Stock Connect Program. [Issuers Want in on China A-Shares ETFs]
With a weight of 17.1%, India is the only other country to receive a double-digit allocation in KEMP and the new ETF’s India weight is 460 basis points higher than VWO’s. Conversely, KEMP’s 4.3% weight to Brazil is less than half VWO’s allocation to Latin America’s largest economy.
KEMP’s largest holding is KraneShares Bosera MSCI China A ETF (NYSEArca: KBA), which accounts for nearly 25% of the new ETF’s weight. Other top 10 holdings include familiar names such as Tata Motors (NYSE: TTM), Infosys (NasdaqGS: INFY) and Baidu (NasdaqGS: BIDU).
One reason A-shares equities have risen in popularity among global institutional investors is reduced correlations to developed and emerging markets stocks.
“An interesting data point to highlight is the lack of correlation the China A market has to other Chinese markets. 11% of the names in MSCI China A are dually listed on the Hong Kong Stock Exchange (Chinese stocks listed on the Hong Kong exchange are commonly referred to as H-Shares). In looking at periods of market stress we find the disconnect between the H-Share and A-Share market noteworthy,” according to KraneShares.
From Sept. 30, 2003 through Sept. 30, 2014, the MSCI China A Index, KBA’s underlying benchmark, had a correlation of just 0.28 to the MSCI Emerging Markets Index and just 0.17 to the MSCI EAFE Index, according to KraneShares data.
KEMP Country Breakdown
Charts Courtesy: KraneShares