The Chinese stock market has been rallying lately thanks to the optimism over the U.S.-China trade deal, the government stimulus and the wide array of reforms. The hot trend is likely to continue as the MSCI move has instilled further confidence in Chinese stocks (read: Trump Postpones Tariff Deadline: 5 Hot China ETFs Set to Rally ).
The global index provider will quadruple the weighting of Chinese mainland shares (A-shares) from the current 5% to 20% for a number of its indexes, most notably the MSCI Emerging Markets Index in three phases - 10% in May, 15% in August and 20% in November. MSCI added 236 China-listed large-cap stocks to its Emerging Markets Index in 2018. Notably, Chinese A-shares were included in the MSCI Emerging Markets Index for the first time last year.
MSCI will also add 168 new mid-cap stocks in November and include 27 shares listed on the tech-heavy ChiNext board for the first time. On completion of the full implementation, the weighting of Chinese stocks in the MSCI Emerging Market Index will jump to 3.3% from the current 0.7% as the index will include 253 large-cap and 168 mid-cap China A-shares.
The move will likely trigger more than $80 billion of fresh foreign inflows into the world's second-biggest economy, per the index provider. JP Morgan JPM believes the inclusion of Chinese shares could draw an extra $85 billion into China's stock market while Goldman GS stated that the overall inclusion factor increase could usher in a potential $70 billion of net buying to A-shares. UBS Securities expects the MSCI changes to likely spur $67 billion in inflows to the A-share market this year alone (read: Loved and Hated ETF Areas of February ).
Other Index Providers
China is set to enter a world bond index in April and a rival global stock index in June. Both FTSE Russell and S&P Dow Jones Indices will start adding yuan-denominated Chinese shares to their global benchmarks.
The news has overshadowed weak data, which showed that Chinese manufacturing activity shrank again in February and led to huge rally in China stocks, especially A-shares. Given this, we have highlighted China-A shares ETFs that will likely explode higher on MSCI's decision at least in the near term. All these funds have a Zacks ETF Rank #3 (Hold) with a High risk outlook.
Xtrackers Harvest CSI 300 China A-Shares Fund ASHR
This fund tracks the CSI 300 Index and holds a basket of 303 stocks with each accounting for no more than 6.63% of assets. The fund has amassed $1.6 billion in its asset base and charges 66 bps per year (read: Top Performing ETF Areas of February ).
KraneShares Bosera MSCI China A Share ETF KBA
This fund follows the MSCI China A Inclusion Index, which tracks the progressive partial inclusion of A shares in the MSCI Emerging Markets Index over time. Holding 474 securities in its basket, it is widely diversified across components with each accounting for less than 2.7% share. It has accumulated $405.2 million in its asset base and charges 0.60% in expense ratio.
iShares MSCI China A ETF CNYA
This product follows the MSCI China A International Index, which comprises domestic Chinese equities that trade on the Shanghai or Shenzhen Stock Exchange. Holding 234 securities in its basket, it is well spread out across components with none making up for more than 4.9% share. The product has AUM of $87.3 million and charges 65 bps in annual fees (see: all the Emerging Asia Pacific ETFs ).
VanEck Vectors China CSI 300 ETF PEK
This fund tracks the CSI 300 Index, which comprises the largest and most liquid stocks in the Chinese A-share market. It holds a basket of 302 stocks with none accounting for more than 6.9% of the assets. The fund has amassed $69.3 million in its asset base and charges 60 bps per year.
Xtrackers Harvest CSI 500 China A-Shares Small Cap ETF ASHS
This fund offers direct exposure to small-cap China A-share equities and follows the China Securities 500 Index. Holding 503 stocks in its basket, it is widely spread across components with none holding more than 0.51% of assets. It is often overlooked by investors as depicted by AUM of $31.5 million and charges 65 bps in annual fees (read: Will the Year of Pig Shower Fortunes on China ETFs? ).
SPDR MSCI China A Shares IMI ETF XINA
This product offers exposure to A shares of companies incorporated in mainland China and tracks the MSCI China A International IMI Index. Holding 618 securities in its basket, it is well spread out across components with none making up for more than 3% share. The product has AUM of $5.1 million and charges 65 bps in annual fees.
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