Investors tracking the iShares MSCI Emerging Markets ETF (NYSEArca: EEM) should not expect any major changes to their holdings after Morgan Stanley Capital International completed its annual review of its market classification and announced it will not include Chinese mainland-traded A-shares in its key emerging market index.
“International institutional investors clearly indicated that they would like to see further improvements in the accessibility of the China A shares market before its inclusion in the MSCI Emerging Markets Index,” Remy Briand, MSCI Managing Director and Global Head of Research, said in a note. “In keeping with its standard practice, MSCI will monitor the implementation of the recently announced policy changes and will seek feedback from market participants.”
Related: China A-Shares ETFs Wait on MSCI Decision
Additionally, MSCI is keeping South Korea as an emerging market.
Consequently, EEM, which tries to reflect the performance of the MSCI Emerging Markets Index, will not experience any major shifts. The ETF currently includes a 25.8% exposure in Chinese companies and 14.7% in South Korea.
[related_stories]MSCI attributed its decision to push off on China A-shares inclusion to accessibility of the A shares market for global investors, despite significant regulatory improvements out of Beijing. Specifically, China’s quota system remains a major hurdle for fund investors in the event of redemptions.
“I’m very happy that MSCI called it out,” Karen Wong, head of equity portfolio management at Mellon Capital Management, told the Wall Street Journal. “They [the Chinese authorities]have probably only done half of what MSCI has asked for.”
Related: Pakistan ETF Rallies on MSCI’s New ‘Emerging’ Designation
While MSCI index-based ETFs do not include China A-shares exposure, a popular FTSE Russell Index-backed emerging market ETF does. The Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO) has been tracking a new FTSE transition index that 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, which will eventually include about a 5% weight in China A-shares. VWO held about a 28.4% tilt toward China and 0% in South Korea since the FTSE classifies South Korea as a developed market.
For more information on the developing economies, visit our emerging markets category.