Market Overview

An ETF Benefiting From MSCI A-Shares Inclusion Flows

An ETF Benefiting From MSCI A-Shares Inclusion Flows

Ahead of next month's inclusion in the MSCI Emerging Markets Index, China A-Shares are getting renewed attention from global investors. That trend has the potential to benefit some U.S.-listed exchange-traded funds, including the KraneShares Bosera MSCI China A Share ETF (NYSE: KBA).

KBA is the first ETF trading in the U.S. to track an MSCI index dedicated to A-shares, the stocks trading on Mainland China. Traditional China benchmarks and ETFs only captured Hong Kong stocks or shares of Chinese companies trading in New York or London.

What Happened

Last year, MSCI, one of the largest providers of benchmarks for use by ETF providers, said it would start including A-shares in its international indexes, including the widely followed MSCI Emerging Markets Index. Over $1.5 trillion in global assets are benchmarked to the MSCI Emerging Markets Index.

“KBA tracks the MSCI China A International Index, which represents the Mainland Chinese equities scheduled for inclusion into MSCI's Global Standard Indexes, including the MSCI Emerging Markets Index,” according to KraneShares.

Why It's Important

MSCI's decision to include A-shares in major international indexes is a sign China is eager to attract more foreign investment and that the country is taking important steps to liberalizing its financial markets.

By some estimates, the inclusion of A-shares in the MSCI Emerging Markets Index could trigger $6.6 billion of passive index funds flows into the asset class with actively managed flows bringing in significantly higher dollar amounts to Mainland Chinese stocks.

That theme is already benefiting KBA. As of May 1, the ETF had almost $375 million in assets under management, of which nearly $100 million has flowed into the fund just this year.

“Foreign investors have been piling into A-share stocks, with money buying from Hong Kong into Shanghai and Shenzhen stocks via the cross-border connect scheme totalling 187.04 billion yuan (US$29.5 billion) in April, up six percent from March,” reports the South China Morning Post.

What's Next

The inclusion of A-shares in the MSCI Emerging Markets Index is expected to bolster institutional access and participation in a corner of the Chinese market usually dominated by local retail investors. The move could also facilitate increased demand for A-shares consumer discretionary and technology shares, two sectors that combine for almost 20 percent of KBA's weight.

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