Vanguard, the second-largest U.S. issuer of exchange traded funds, procured a massive renminbi qualified foreign institutional investor (RQFII) quota from Chinese regulators as the Pennsylvania-based fund giant looks to add China A-shares to some of its international and emerging markets funds.
Those plans include the previously announced addition of A-shares to the Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO), the largest emerging markets ETF by assets.
“Vanguard Group garnered a 20 billion renminbi ($3 billion) quota from Chinese regulators on Jan. 29 for investment in Shanghai- and Shenzhen-listed A shares, China’s largest single quota award since foreign investors gained their first, limited access to the country’s capital markets in 2003,” reports Douglas Appell for Pensions & Investments.
In early November, VWO started tracking the new FTSE transition index that will begin building exposure to small-capitalization stocks and China A-shares before finalizing the switch to the FTSE Emerging Markets All Cap China A Inclusion Index, according to Vanguard Group.
VWO will follow a transition index for approximately one year to diminish costs associated with the huge amount of securities that will need to be acquired. Specifically, the fund will sell large- and mid-cap stocks on a monthly basis while proportionally adding China A-shares and small-cap ex China A-shares.
“The initial weighting of China A Shares in the FTSE Emerging inclusion indexes will be approximately 5%. This is expected to increase to 32% (at 31-March 2015 market values) when China A Shares are fully available to international investors, and hence resulting in Chinese stocks (including B-Share, H-Share, P Chips and Red Chips) to make up 50% of FTSE Emerging Index,” FTSE Russell previously said in statement.
Through the changes, VWO will be the first broad market-cap-weighted index fund to include both all-cap exposure and China A-shares as the ETF moves toward a more inclusive market-cap weighted methodology. While current index-based emerging market funds include a heavy tilt toward China, most offerings only track Chinese H-shares that are listed in Hong Kong or Chinese companies listed in the U.S. Consequently, with the inclusion of Chinese A-shares, China’s domestic markets may play a more direct role in investors’ portfolios.
“In June, Vanguard announced it had received the largest first-time quota ever awarded, at 10 billion renminbi, in tandem with the firm’s decision to benchmark its then-$69 billion emerging markets stock index fund/exchange-traded fund to a new FTSE China inclusion index with an initial 5% weighting for A shares,” according to Pensions & Investments.
Vanguard FTSE Emerging Markets ETF
