Exchange-traded funds linked to the MSCI Emerging Markets Index and MSCI All Country World Index (ACWI) are prepping for a major rebalance ahead of the implementation of MSCI’s semi-annual index review at the end of May.
The changes are expected to be implemented on 28 May 2019.
The two benchmarks act as underlying reference indices for numerous ETFs, accounting for many tens of billions of dollars of assets under management.
Among the largest to be affected by the reshuffle are the $57bn iShares Core MSCI Emerging Markets ETF (IEMG US) and $10bn iShares MSCI ACWI ETF (ACWI US) in the US, and the $6.6bn Amundi MSCI Emerging Markets UCITS ETF (AEEM FP) and $6.7bn UBS ETF (IE) MSCI ACWI SF UCITS ETF (ACWIA SW) in Europe.
Several notable changes – to be implemented on 28 May 2019 – are set to occur within the current review and will have a material impact on both indices, but particularly the EM index.
Landmark changes
The index provider is to increase the inclusion of China A-shares, moving from a 5% inclusion factor to 10%. The move is part of a series of increases planned for this year which will ultimately see the inclusion factor reach 20% by November. This increase will raise the weighting of A-shares in the MSCI EM index from 0.8% to 1.6%.
The raising of the inclusion factor comes at a time when investors are cutting back on China exposure, alongside a wider sell-off in emerging market equities, exacerbated by a renewal of trade tensions between China and the US. The iShares MSCI China A ETF (CNYA US), which covers all China A-Shares included in the MSCI EM Index, is down 17% over the past month.
That said, overall, CNYA and other A-share ETFs have enjoyed a very successful year so far, delivering strong market performance and attracting considerable new assets. Much of it, of course, in anticipation of MSCI’s review.
Despite China’s growing importance, the largest impact on the MSCI EM index will actually be caused by the inclusion of Saudi Arabian equities for the first time, following the country’s upgrade to emerging market status. The Kingdom will command an initial weight of 1.4% in the MSCI EM Index following the May rebalance which will be raised to 2.7% in August. Following the completion of the second phase, Saudi Arabia will be the eighth largest EM country exposure overall.
Over the past year, Invesco, BlackRock, and HSBC have all rolled out pure-play Saudi Arabia ETFs in Europe, seeking to capture a slice of the expected spike in investor demand for access to the Kingdom following its accession to EM status.
The third development is that Argentina will also enter the two indices, albeit at a much smaller weight, making up just 0.3% of the MSCI EM Index and even less in the ACWI. MSCI has upgraded Argentina to an emerging market from a frontier market.
Sizeable trading event
As with all MSCI index reviews, the process will create a certain amount of turnover as companies are added and removed. However, this rebalance is likely to be the largest in history, especially with reference to the MSCI Emerging Markets Index.
Antoine Lesne, Head of SPDR ETF Research and Strategy EMEA, said: “The scale of the rebalance stems from several changes being made to the index composition, with new countries getting added and weights of other countries increasing. The month of May tends to be a fairly large rebalance, as it is a semi-annual universe review, as well as being the Annual Full Country Float Review implementation. However, the extra changes on top of this could see this month’s rebalance be a record for one-way turnover.
“Given MSCI estimates that $1.9 trillion of assets are currently benchmarked to the MSCI Emerging Markets Index, this is likely to be a sizeable trading event.”