ETF Trends
ETF Trends

On Tuesday, MSCI (NYSE: MSCI) said it will add China A-shares, the stocks trading on mainland exchanges in Shanghai and Shenzhen, to its global benchmarks once China resolves some lingering market accessibility issues.

In anticipation of MSCI green-lighting the entry of A-shares into widely followed benchmarks, such as the MSCI Emerging Markets Index, investors piled into two A-shares exchange traded funds issued by Deutsche Asset & Wealth Management (Deutsche AWM), the ETF unit of German banking giant Deutsche Bank (NYSE: DB).

For the three weeks ended June 9, the day of the MSCI announcement, which came after the close of U.S. markets, investors added nearly $155.1 million in new assets to the Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (NYSEArca: ASHR). That is roughly 10% of the $1.55 billion in assets held by ASHR, the largest U.S-listed A-shares ETF. [Waiting on MSCI, A-Shares ETFs Rally]

Over the same period, investors pumped $55.4 million into ASHR’s small-cap stablemate, the Deutsche X-trackers Harvest CSI 500 China A-Shares Small Cap Fund (NYSEArca: ASHS). That is nearly half the almost $119 million held by ASHS. Up 109% this year, ASHS is the second-best non-leveraged ETF this year trailing only the Market Vectors ChinaAMC SME-ChiNext ETF (NYSEArca: CNXT).

The three weeks ended June 9 includes May 26, the day MSCI rival FTSE Russell said it will include A-shares in its global benchmarks. [Index Changes Could Boost China ETFs]

Regarding the Renminbi Qualified Foreign Institutional Investor (RQFII) scheme, which allows the funds to purchase A-shares equities, MSCI said, “Global investors told MSCI that having reliable access to quota is a critical requirement.”

Investors believe they should be given A-shares quota in-line with their size, an issue that is of particular importance to passive managers, notes MSCI. ASHR and ASHS have, at several points during the short trading histories, had to limit creations of new shares, due to robust investor demand forcing the ETFs to bump up against their RQFII quotas. [Another Creation Limit for an A-Shares ETF]

“Liquidity is a critical component of the investment process. Regardless of the channel they use, investors say that they need access to daily liquidity. They believe that this access should apply to all investment vehicles,” according to MSCI.

However, thanks in part to the Hong Kong/Shanghai Stock Connect program, Deutsche AWM has been able to increase quotas and source additional liquidity for ASHR and ASHS, something market makers and authorized participants are aware, but many advisors and investors do not yet know about.

“Liquidity is a critical component of the investment process. Regardless of the channel they use, investors say that they need access to daily liquidity. They believe that this access should apply to all investment vehicles,” according to MSCI.

A-shares quotas and liquidity are expected to further improve later this year when the Hong Kong/Shenzhen Stock Connect launches, which could lead to MSCI adding A-shares to its indexes.

Deutsche X-trackers Harvest CSI 300 China A-Shares ETF