MSCI Indexes Will See Larger A-Shares Weights

MSCI Inc. MSCI, one of the largest providers of indexes used by issuers of exchange traded funds, said Thursday it will increase the weight of China A-shares stocks in its indexes from 5 percent to 20 percent in a three-step process.

By the end of this year, the widely followed MSCI Emerging Markets Index could see its A-shares exposure increase from 0.7 percent to 3.3 percent.

What Happened

Last year, MSCI made the decision to include A-shares — the stocks trading on mainland China exchanges in Shanghai and Shenzhen — in its international benchmarks.

MSCI's decision “follows an extensive global consultation with a large number of international institutional investors, including asset owners, asset managers, broker-dealers and other market participants worldwide,” said MSCI. “The proposal to increase the weight of China A shares garnered overwhelming support from investors.”

Why It's Important

MSCI's decision could spark up to $80 billion of inflows from foreign investors' A-shares stocks, according to Reuters.

Active fund managers that benchmark to MSCI indexes will also need to buy more A-shares as the asset class's profile increases in those indexes.

Several A-shares ETFs trading in New York could benefit from those themes, but perhaps none more than the KraneShares Bosera MSCI China A Share ETF KBA. KBA follows the MSCI China A Inclusion Index, a benchmark specifically designed for the MSCI A-shares inclusion process.

Investors are catching on. In late December 2018, KBA had $304 million in assets under management, a total that has swelled to $405.21 million as of Feb. 27. KBA is home to many of the stocks that are already or will be included in MSCI's A-shares inclusion process.

What's Next

“On completion of this three-step implementation, there will be 253 large- and 168 mid-cap China A shares, including 27 ChiNext shares,on a pro forma basis in the MSCI Emerging Markets Index, representing a weight of 3.3 percent in the pro forma index,” according to MSCI.

As of the end of 2018, about 98 percent of KBA's holdings were large- and mid-cap stocks. KBA is up 24.61 percent this year.

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