Popular Emerging Markets ETF Will See More China A Shares Exposure After FTSE Index Changes

FTSE Russell has officially incorporated China A Shares into its global equity benchmarks, including the widely observed FTSE Emerging Index, which serves as a benchmark for one of the most popular emerging market-related exchange traded funds.

“As a result of ongoing enhancements to market access, governance standards and regulation, China A Shares have now been included in FTSE Russell’s global equity benchmarks,” according to a FTSE Russell note.

On June 24, mainland China listed companies, or China A Shares, will be included in FTSE Global Equity Index Series (GEIS). The indexer will incorporate over 1,000 small-, mid- and large-cap China A Shares to make up about 5.5% of the total FTSE Emerging Index.

“We are pleased to confirm that we have successfully begun to include China A Share stocks with the FTSE Emerging Index. The inclusion of a diverse mix of small, mid and large-cap Chinese stocks covering over 1000 companies is a significant milestone and marks the beginning of a longer journey that will increase connectivity between Chinese companies and international investors,” Jessie Pak, Managing Director, Asia, FTSE Russell, said in a note.

Pak attributed the changes in the indexing methodology to reforms and maturing financial markets that have opened up China to greater international access.

“The drivers for this are clear. Over the past decade, China has made great strides in opening up its market as part of an extraordinary economic transformation over the last 40 years which has seen it grow to become the second largest economy in the world. Like any emerging market, development is not linear and we will measure progress at the completion of each phase,” Pak added.

China A Shares will not be dumped into FTSE Russell’s global equity index but gradually phased in over time, with Phase 1 beginning in conjunction with the FTSE GEIS June 2019 quarterly review and completing in conjunction with the March 2020 semi-annual review. The total market capitalisation of China A Shares included in the FTSE Emerging Index is $59 billion with $295 billion to be added by March 2020.

Investors who have used Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO) will be exposed to China A Shares. VWO currently tracks the FTSE Emerging Markets All Cap China A Inclusion Index, which has acted as a transitional benchmark while FTSE Russell finalized the inclusion of China A Shares into its benchmark emerging market index. Vanguard will have to rebalance its fund to include the proposed 1,000 or so mainland Chinese stocks for inclusion.

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