Why This ETF May Be The Better A-Shares Inclusion Play

Last week, index provider MSCI said it will move forward with the third step of its China A-shares inclusion undertaking on Nov. 26, a process that will deliver more stocks traded on Mainland China to MSCI's international benchmarks, including the MSCI Emerging Markets Index.

What Happened

There are several U.S.-listed exchange traded funds dedicated to A-shares stocks including the KraneShares Bosera MSCI China A–Share ETF KBA. Several of these funds track the CSI 300 Index, a widely followed A-shares gauge. For its part, KBA follows the MSCI China A Index, which is more exposed to the stocks the index provider is moving to its benchmarks.

“Two hundred and four China A shares, 189of which are Mid Caps, will be added to the MSCI China Index and the inclusion factor for 268 existing constituents will be increased from 0.15 to 0.20. China A shares will have weights of 12.1% and 4.1% in the MSCI China and MSCI Emerging Markets Indexes, respectively,” according to MSCI.

Why It's Important

MSCI's inclusion is relevant to KBA because the KraneShares fund's index “reflects a 20% inclusion factor for China A large-cap, mid-cap, and eligible ChiNext shares within the MSCI Emerging Markets Index,” according to the issuer.

Year to date, KBA is up 28.8%, slightly trailing the CSI 300 Index, but the KraneShares ETF has been less volatile than that index. With MSCI's inclusion effort due to include many KBA holdings later this month, the fund could be poised to surpass the CSI 300 as index funds and active managers start buying KBA holdings to come inline with the new look MSCI Emerging Markets and China indexes.

“We believe that the MSCI China A Index has distinct advantages over other popular Mainland China benchmarks, in particular, the CSI 300 Index,” said KraneShares in a recent note. “The CSI 300 Index, originally built for domestic Chinese investors, consists of the 300 largest China A-Share stocks ranked by market capitalization. In comparison, the MSCI China A Index currently tracks 443 securities that meets MSCI’s criteria for international investors.”

Additionally, KBA's underlying index has more diverse market cap exposure while the CSI 300 is a large-cap only gauge.

What's Next

KBA is also more levered to growthier areas of the Chinese economy. For example, its underweight financial stocks by 460 basis points compared to the CSI 300.

“With a decreased weight in financials and increased weight in growth sectors such as information technology and healthcare, we believe the MSCI China A Index is a more holistic representation of the mainland China market than the CSI 300 Index,” according to KraneShares.

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