Area Emerging Market ETF Investors Must Monitor | ETF Trends

China has opened up to more foreign investors, providing greater access to its A-shares market. The loosened controls over the mainland Chinese shares could significantly impact broad emerging market indices and related exchange traded funds.

While China is trying to gradually liberalize its economy, index provider MSCI is closely monitoring China A-shares that trade on Shanghai and Shenzhen exchanges for inclusion in its global equity indices, writes Patricia Oey, senior analyst at Morningstar.

“The addition of China A-Shares would have a significant impact on the MSCI Emerging Markets Index,” Oey said. “China already accounts for 25%-30% (via Hong Kong-listed Chinese stocks) in this benchmark, so the addition of China A-Shares would result in a much larger China allocation.”

For ETF investors, the widely observed iShares MSCI Emerging Markets ETF (NYSEArca: EEM), which tracks the MSCI Emerging Markets Index, could make some changes ahead.

In its June 2015 Annual Market Classification Review announcement, MSCI stated that the limited market accessibility remains an obstacle to China A-shares inclusion in its indices. However, the index provider is open to China A-shares inclusion as China’s regulators provide more transparency and further ease capital mobility restrictions for foreign investors. [MSCI Delays Addition of China A-Shares to Global Indexes]

Meanwhile, the Vanguard Group has stated that it will add China A-shares to its Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO), which tracks the FTSE Emerging Index but will later switch to an index that includes China A-shares at a capped level. VWO’s exposure to Chinese A-shares could gradually increase as China frees up a greater portion of its domestic market to foreign investors. [China ETFs Surge After FTSE Move to Include A-Shares in Global Indexes]