An EM ETF Opportunity to Get in Before Major MSCI Changes

Morgan Stanley Capital International, or MSCI, has announced it will add China A-shares into its benchmark indices. In anticipation of the changes, investors will have an opportunity to jump in and ride the wave through China A-shares-specific exchange traded funds.

In the recent 2017 market classification review, MSCI announced plans to add 222 China A Large Cap stocks to its benchmark MSCI Emerging Markets Index. It will initially add about 0.73% of the weight of the EM Index during its May 2018 Semi-Annual Index review and gradually increase the exposure to China A-shares to minimize the effects of the buying spree on market prices.

This can potentially be a huge deal for Chinese markets as MSCI is the world’s biggest stock index provider, with the MSCI Emerging Market Index currently having about $1.6 trillion tracking it. Consequently, any changes to the benchmark will create sizeable waves in global markets as big and small investors scramble to make changes to their portfolios.

Currently, the benchmark MSCI EM Index includes Hong Kong-listed or NYSE-listed Chinese company stocks to help investors gain indirect exposure to Chinese companies, which leaves many woefully underallocated to Chinese markets – about less than 2% of domestic Chinese shares and bonds are held by foreigners.

“Investors should have A-shares in portfolios, especially emerging market investors,” Luke Oliver, Head of U.S. ETF Capital Markets for Deutsche X-trackers US, told ETF Trends in a call. “MSCI validates this thesis with inclusion of A-shares. If you’re in EM now, you’re not really in it without China A-shares.”

Looking beyond the potential benefits of increased demand for China A-shares ahead of the major index changes, Chinese markets exhibit strong macro fundamentals. Robert Bush, ETF Strategist for Deutsche Asset Management, said in a note Deutsche Bank forecasts the economy to grow 6.3% this year and the next in its ongoing stellar growth that defined the economy for much of the last few decades.