As China’s A-shares, the stocks trading in Shanghai and Shenzhen, have become increasingly accessible to U.S. investors via exchange traded funds, speculation has intensified regarding when major index providers will add stocks trading on China’s mainland to well-known emerging markets benchmarks.
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. [The Case for A-Shares Allocations]
Exclusion of A-shares from indexes such as the MSCI Emerging Markets Index and the FTSE Emerging Markets Index has left investors to wonder what diversified emerging markets ETFs would look like if A-shares were included. The newly minted KraneShares FTSE Emerging Markets Plus ETF (BATS: KEMP) answers that question.
KEMP, which launched in February, is the first diversified emerging markets ETF to include China A-shares. The new ETF does so by way of an almost 20% allocation to the KraneShares Bosera MSCI China A ETF (NYSEArca: KBA). That is proving to be an impactful strategy for KEMP.
KBA is up nearly 33% since KEMP debuted, translating to a 9.3% for the latter. Over the same period, theVanguard FTSE Emerging Markets ETF (NYSEArca: VWO), which tracks the FTSE Emerging Index, and the iShares MSCI Emerging Markets ETF (NYSEArca: EEM), which follows the MSCI Emerging Markets Index, are up an average of 5.8%. [This EM ETF has A-Shares]
“KEMP is the only broad EM index that is GDP weighted. By including the onshore Chinese market today, it is what other EM indices are apt to look like tomorrow. It also raises India and China while lowering natural resource and oil dependent countries,” said KraneShares Chief Investment Brendan Ahern in an email exchange with ETF Trends.
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.
India is KEMP’s second-largest country weight after China at 17.1%. That is 460 basis points more than the FTSE Emerging Markets Index allocated to Asia’s third-largest economy at the end of March. KEMP also features less than half of the Brazil weight as the traditional FTSE index.
“I don’t believe there has been a good look at what’s effecting EM investors. I believe there are two EM headwinds: increased US oil production and slowing Chinese fixed asset investment growth (building stuff). US oil production and the fall in oil prices has hurt many oil dependent countries. China’s slowing appetite for raw materials effects many EM countries as China is there number one export market (Brazil, Peru, Chile, and South Africa). There are winners such as India which buy oil and natural resources at these lower prices,” adds Ahern.
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]
KraneShares FTSE Emerging Markets Plus ETF