As A-Shares Inclusion Nears, This ETF Is Getting Bigger

Index provider MSCI Inc. MSCI is just a few days away from finally adding stocks traded on mainland China, also known as A-shares, to its international benchmarks, including the widely followed MSCI Emerging Markets Index.

MSCI made the announcement last year. A-shares are poised to become more accessible to a broader audience of global investors, potentially providing a boost to exchange traded funds such as the KraneShares Bosera MSCI China A Share ETF KBA.

What Happened

There are several A-shares ETFs trading in the U.S., but KBA was the first to track an index sponsored by MSCI. KBA follows the MSCI China A Inclusion Index, which is home to the very companies MSCI will be elevating to the MSCI Emerging Markets Index. Investors have been flocking to the fund in the last week.

Last week, KBA saw inflows of over $100 million, bringing its assets under management tally to $529 million while making it the largest A-shares ETF tracking an MSCI index in the world, according to KraneShares data.

Why It's Important

MSCI is slated to start adding A-shares to its emerging markets benchmark on June 1 with a second inclusion round scheduled for September 1.

“MSCI will likely hold a consultation to assess their clients’ experience investing in the 234 securities we hold in KBA today,” said KraneShares. “Based on the feedback, the pace and size of subsequent inclusions will be determined. KraneShares believes it could take three to five years for the full inclusion to be implemented following MSCI’s schedule of June 1 and December 1 Semi-Annual Index Reviews.”

Over 70 percent of KBA's are large-caps while just over 28 percent are classified as mid-cap stocks. The ETF devotes over 53 percent of its weight to two sectors: financial services and industrials.

Why It's Important

Not all of the 3,000-plus companies trading in Shanghai and Shenzhen are eligible for inclusion in the MSCI Emerging Markets Index, indicating KBA holdings meet stringent global institutional standards.

“For example, companies must be profitable for at least three years before listing on the Main Board. Managers will reward the companies that most adhere to their standards while investors are increasingly pushing for strong corporate governance from their holdings,” said KraneShares. “MSCI has created incentives for companies to adhere to global standards by excluding stocks that do not meet their criteria.”

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