Next week, index provider MSCI Inc. (MSCI) will release its annual market classification, an announcement that could have a major impact on emerging markets indexes and the investments linked to those benchmarks. The announcement that will be most widely followed is whether or not China A-shares, the stocks trading on mainland exchanges in Shanghai and Shenzhen, will be elevated to MSCI's international equity indexes. That includes the MSCI Emerging Markets Index, to which over $1.5 trillion in assets are benchmarked.

A spate of recent inflows to at least one U.S.-listed A-shares exchange-traded fund (ETF) could be a sign that some market participants are expecting A-shares to be on the receiving end of some good news from MSCI on June 20. The KraneShares Bosera MSCI China A ETF (KBA) has been adding new assets in significant fashion since last month. KBA "saw $49.5 million of inflows in May, its best month ever, according to data compiled by Bloomberg. So far in June, $67.5 million has poured into China equity funds listed in the U.S., compared with $100 million of outflows during the first five months of the year, the data show," according to Bloomberg. (See also: Hit the Mainland With This China ETF.)

KBA, the first A-shares ETF in the U.S. to track an index from MSCI, is up more than 6 percent over the past month and 10.2 percent year to date. KBA, which is over three years old, tracks the MSCI China A International Index. The ETF's relationship with that index is important ahead of the MSCI announcement because, as KraneShares highlighted in a recent research note, many market observers expect MSCI to follow strict rules in elevating A-shares to international indexes. That promotion is likely to pertain only to the stocks in the MSCI China A International Index. (See also: Save the Date for These China ETFs.)

KBA holds 230 stocks, which is more than the nearly 170 that are under consideration by MSCI for the upgrade to the MSCI Emerging Markets Index. At the end of the first quarter, KBA allocated nearly one-third of its weight to financial services stocks, while industrial and consumer discretionary names combined for over 28 percent of the ETF's weight.

Citing market accessibility, among other issues, MSCI has previously denied the emerging markets index promotion to A-shares on three separate occasions, including in 2016. That precedent has prompted traders to take precautions ahead of June 20. "Traders have driven up short interest in three of the biggest U.S.-listed China ETFs in a sign they may be looking for protection in case China stocks are rejected again," reports Bloomberg. (See also: Top 3 China ETFs for 2017.)



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