ETF Investors to Buy More China Shares

FTSE and MSCI have announced plans to include more mainland China listed shares in their indices. Morningstar's Jackie Choy explains the impact for passive fund investors

Emma Wall 12 October, 2018 | 7:05AM
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Emma Wall: Hello, and welcome to the Morningstar series, "Ask the Expert." I'm Emma Wall and I'm joined today by Morningstar's Jackie Choy to talk about developments in the Asian ETF market.

Hi, Jackie.

Jackie Choy: Hi, Emma.

Wall: So, before we get into the latest developments in the ETF market, I thought we should quickly touch on what's been going on in equity markets in Asia because it's been a pretty bad couple of weeks, hasn't it?

Choy: Definitely a bad couple of weeks. It's not just Asia. It's actually like worldwide. And especially, in Asia, you see, like the heavy weight stock Tencent tanked 20% year-to-date so far this year.

Wall: And September wasn't so bad. So, it really has just been October that has seen quite considerable losses, as you say, in the A share market in China, across Asia and indeed, actually, globally?

Choy: Indeed, yeah. It's really just starting from October.

Wall: And so, now we've got that out of the way, I thought we could talk about what has happened, some positive news for ETF investors. There have been some developments to do with indices, haven't there?

Choy: That's right. So, recall that in August, at the end of August, MSCI has completed their first two steps of including A shares into their indices. So, it was at the end of September FTSE Russell announced to include A shares into their indices as well. And just one day before FTSE, MSCI proposed to increase their stake in A share as well. So, a lot of things happening in the A share market.

Wall: And when will investors see this new inclusion? Because it's not immediate, is it?

Choy: It's not immediate. So, FTSE will include them from June 2019 and MSCI is proposing increase their inclusion factor from their May 2019 review. So, it's not immediate. But then, from sort of like next year onwards things will be getting complicated a little bit in the A share market within the index world.

Wall: And how much is this increase? Because I know we've talked last month about how significant the MSCI inclusion of China A shares were into its Asia and emerging markets indices. And you were quick to point that although it was quite significant move, the actual proportion of the index still remained quite low. So, will this still be the case for FTSE and indeed for the increase for MSCI?

Choy: Right. So, first of all, let's talk about MSCI. So, last time we talked about after the August inclusion the weight of China A shares within the MSCI EM Index was 0.7%. But if the new proposal goes through, like, increasing inclusion factor, adding mid-caps for A shares, that will increase the weight for A shares to 3.5%. So, not that big, but still a very big portion from the original 0.7%. And with FTSE, the inclusion would – after the three tranches of inclusion for FTSE, that will increase A shares from zero obviously now to about 5.5%.

Wall: And that is quite a significant increase. You are basically saying, for each year to track those particular indices you're going to go as an investor from having absolutely no exposure to the China A share market to having 5.5% of your portfolio invested in those stocks?

Choy: That's right. So, obviously, the index did change, and inflows would go into the A share market to buy into these A shares as well. So, quite a big change. But just one sort of note for investors. Some of the FTSE indices already included A share. For example, the FTSE EM China Inclusion Index, which one of the Vanguard ETF tracks, already includes A shares at around like 4%. So, investors really have to understand the actual index which the ETF tracks.

Wall: Jackie, thank you very much.

Choy: Thank you, Emma.

Wall: This is Emma Wall for Morningstar. Thank you for watching.


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Emma Wall  is former Senior International Editor for Morningstar

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