Global exchange traded fund investors may see their China exposure rise ahead as MSCI plans to add U.S.-listed Chinese companies to its international indices.
On December 1, index provider MSCI will included all 14 U.S.-listed China stocks in its indices, including prominent Chinese e-commerce names like Alibaba (NYSE: BABA) and Baidu (NasdaqGS: BIDU), Reuters reported.
In total, MSCI will add 14 companies, including Alibaba, Baidu, , Ctrip (NasdaqGS: CTRP), JD.com (NasdaqGS: JD), Netease (NasdaqGS: NTES), New Oriental Education (NYSE: EDU), Qihoo (NYSE: QIHU), Qunar Cayman Islands (NasdaqGS: QUNR), Soufun Holdings (NYSE: SFUN), Tal Education (NYSE: XRS), Vipshop Holdings (NYSE: VIPS), Youku Tudou (NYSE: YOKU), YY (NasdaqGS: YY), and 58.com (NYSE: WUBA), reports Bob Pisani for CNBC.
For ETF investors, this means China country-specific ETFs that track MSCI China Index, which typically leans toward the financial sector, will have greater technology exposure. The iShares MSCI China ETF (NYSEArca: MCHI), which tracks the MSCI China Index, currently includes a 41.5% weight in financials and 14.8% in information technology. Kraneshares calculates that the MSCI China Index tech weight could rise to 27% after the changes.
According to some observers, the information technology services companies, which include the Chinese e-commerce giants, are more reflective of China’s domestic consumption and the growth story in the emerging economy.
Additionally, with the inclusion of U.S.-listed Chinese stocks, the broader iShares MSCI Emerging Markets ETF (NYSEArca: EEM), which tracks the MSCI Emerging Markets Index, could have a larger tilt toward China. China currently makes up 23.8% of EEM’s portfolio. After the inclusion of U.S.-listed Chinese shares, the MSCI Emerging Markets Index could see China’s weight rise to 29%.
Rival FTSE Russell Indexes currently excludes Alibaba and Baidu from well-known ETFs, including the Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO), the largest emerging markets ETF by assets, and the iShares China Large-Cap ETF (NYSEArca: FXI), the largest China country-specific ETF.
S&P Dow Jones Indices was the first of the major index providers to allow for the inclusion of Alibaba in its global benchmarks. The index provider announced the U.S.-listed Chinese stock inclusion to its benchmarks 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). Among its top holdings, GXC includes a 6.5% position in BABA, 4.5% in BIDU and 1.8% in JD.
Looking ahead, MSCI is still thinking about adding China A-shares, which trade on mainland Shanghai and Shenzhen stock exchanges, into its benchmark indices. By adding the A-shares, the MSCI Emerging Markets Index could see China’s weight jump to 40% from roughly 29%.
FTSE Russell Indexes has already taken steps to add Chinese A-shares to its benchmarks. The index provider has stated that China A-shares will make up 32% of the FTSE Emerging Markets Index as the indexer incrementally adds on exposure. [A First For Broad Emerging Market ETFs]
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