More A-Shares Inclusion Could Lift This China ETF

MSCI Inc. (MSCI), one of the largest providers of indexes for use by issuers of exchange-traded funds (ETFs), recently completed its initial inclusion of China A-shares in its international benchmarks, including the MSCI Emerging Markets Index. A-shares are the stocks trading in Mainland China on exchanges in Shanghai and Shenzhen.

"The 5% initial inclusion of China A shares was successfully implemented in May and August 2018 with overwhelming positive feedback from market participants," said MSCI. The initial implementation went so well that MSCI is launching a new consultation with clients to mull larger weights of China A-shares in the providers international benchmarks. That could boost the KraneShares Bosera MSCI China A Share ETF (KBA). 

KBA is one of several U.S.-listed ETFs providing exposure to Mainland China equities, but KBA was also the first ETF to track an MSCI index. Currently, the $325.64 million KBA targets the MSCI China A Inclusion Index. That benchmark "is designed to track the progressive partial inclusion of A shares in the MSCI Emerging Markets Index over time," according to New York-based KraneShares. "The index is designed for global investors accessing the A shares market using the Stock Connect framework and is calculated using China A Stock Connect listings based on the offshore RMB exchange rate (CNH)."

If MSCI clients agree to further A-shares additions, those additions could be significant. Currently, KBA holdings represent 0.71% of the MSCI Emerging Markets Index, but that number could swell to 2.82% if fully implemented, according to KraneShares. Full A-shares implementation would boost China's weight in the MSCI Emerging Markets to around 40% from 30%.

"With an increase of the inclusion factor of China A Large Cap securities to 20%, the pro forma index weight of China A Shares in the MSCI Emerging Markets Index would be 2.8% in August 2019," said MSCI. "The addition of China A Mid Cap securities with an inclusion factor of 20% in May 2020 would increase the pro forma weight further to 3.4%."

KBA devotes just over two-thirds of its weight to large-cap A-shares and nearly 30% to mid-cap stocks. Financial services represent the ETF's largest sector weight at nearly 34%. (For more, see: An Inside Look at Investing in China.)