MSCI Includes China A Shares in Emerging Markets Index

MSCI has announced that it will include China A-Shares in its Emerging Markets Index. What Does it mean for ETFs and index funds?

Jackie Choy, CFA 21 June, 2017 | 4:23PM

MSCI has announced that it will include China A-Shares in its Emerging Markets Index. A total of 222 A-Shares will be added to the MSCI EM Index under as part of a two-step process which will begin in May 2018. The A-Shares to be included in the index are large-cap stocks that are eligible for the Stock Connect Programmes. Upon completion, Chinese A-Shares will represent approximately 0.73% of the value of the MSCI Emerging Markets Index.

In its press release announcing the decision, MSCI stated that its decision to include A-Shares is primarily a result of the positive impact of the Stock Connect programme and the loosening by local Chinese stock exchanges of pre-approval requirements that can restrict the creation of index-linked investment vehicles globally have had on the accessibility of the China A-market.

What Does it Mean for Passive Fund Investors?

ETFs and index funds tracking the MSCI China, MSCI Emerging Markets, and other indices will add some or all of these 222 A-Shares to their portfolios and will ultimately follow along, reacting to any subsequent inclusions that materialise as part of this longer-term roadmap. This inclusion brings A-Shares deeper into the global investment arena, and we urge investors to make an effort to understand the fundamentals of investing in China A-Shares which are slated to grow in their importance in global benchmarks.

We believe other index providers will also be likely to review their China A-Share inclusion plans. While the current A-Shares inclusion only represents a small weighting in global benchmarks – 0.1% in MSCI ACWI; 0.73% in MSCI EM, we would suggest investors reassess their positions as it pertains to country weights and industry weights, especially as the different indices continue to adjust their scope of A-Share inclusion.

MSCI's inclusion brings A-Shares deeper into the global investment arena. China A-Shares will continue to grow in their importance in global benchmarks. We believe other index providers are likely to review their China A-Share inclusion plans.

Most notably, China A-shares remain on FTSE Russell's Watch List, and will be reviewed for possible addition to the FTSE Global Equity Index Series as a Secondary Emerging market at the firm's next Annual Review in September 2017. However, recall that in May 2015, FTSE Russell introduced "China A-share Inclusion Indices" as a transitional tool for investors in anticipation of the eventual inclusion of China A-shares in its global benchmarks.

Vanguard FTSE Emerging Markets ETF listed in the US, subsequently switched to the FTSE Emerging Markets All Cap China A Inclusion Index and added China A-Shares in their portfolios. As of 31 May 2017, the FTSE Emerging Markets All Cap China A Inclusion Index has a 5% stake in A-Shares. This is much larger than the pro forma A-Shares weighting of 0.73% in the MSCI EM Index.

Investors should continue to understand further the fundamentals of the A-Share market, as well as the makeup of the indices tracked by the various funds tied to them, as the A-Shares exposures could be quite different for any chosen ETF.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author

Jackie Choy, CFA  is an ETF strategist at Morningstar, based in Hong Kong.

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