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A Big Emerging Market ETF Will Look Different Very Soon

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November 13, 2015 7:20 am
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A Big Emerging Market ETF Will Look Different Very Soon

The iShares MSCI Emerging Markets ETF (NYSE: EEM), the second-largest emerging market exchange traded fund by assets, is expected to look different next month as index provider MSCI Inc. (NYSE: MSCI) proceeds with the inclusion of companies with primary exchange listings in countries away from home domiciles in the firm's international benchmarks.

Companies traded outside of the country of classification (i.e., "foreign listed companies"), terminology used by MSCI, include well-known Chinese Internet and technology firms such as Alibaba Group Holding Ltd. (NYSE: BABA) and Baidu Inc. (NASDAQ: BIDU). Those companies and others will be added to the MSCI Emerging Markets Index on December 1, which could lure added investments to funds tracking that benchmark of $70 billion or more.

KraneShares CSI China Internet Fund (NASDAQ: KWEB). Home to a combined weight of nearly 18 percent to Alibaba and Baidu, KWEB has climbed 13.5 percent over the past month as Baidu, China's largest Internet search provider, has surged more than 35 percent over that period.

Related Link: Getting Contrarian With Emerging Market ETFs

"MSCI's inclusion of the top U.S.-listed Chinese companies into their indices will trigger massive inflows into the stocks KWEB holds today. On October 23rd Goldman Sachs estimated the inflows could be as high as $78 billion. With all these factors firmly in place, we believe KWEB may continue its recent strong performance," said KraneShares in a recent research note.

Another ETF to consider on the back of the MSCI news is the KraneShares CSI China Five Year Plan ETF (NYSE: KFYP). That ETF "invests in publicly traded China-based companies whose primary business or businesses will be key components of the Chinese government's current Five Year Plan," according to KraneShares.

One of the pillars of China's most recent Fifth Plenum meeting was the continued move to a consumption-oriented economy.

"While the entire contents of the draft have yet to be announced, we are paying particularly close attention to the following areas: liberalization of equity, fixed income and currency markets; support for internet related businesses in the form of the 'Internet Plus' strategy; and further domestic consumption incentives," notes KraneShares.

Those themes should benefit KFYP, which allocates nearly 69 percent of its combined weight to consumer discretionary and technology stocks. Not only does KFYP hold no financial services stocks, the ETF is home to a broad swath of names that qualify as foreign listed companies in the eyes of MSCI.

Since coming to market nearly two and a half years ago, KFYP has gained 20.5 percent. Over the same period, the three largest China ETFs trading in New York, excluding A-shares funds, have returned an average of less than 9 percent.


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