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China Internet ETFs 101

The China N-Share Inclusion Countdown Clock

Back on January 15, 2015 – MSCI, a leading provider of index solutions globally, made a huge announcement that received little to no media attention at the time.

MSCI announced that U.S.–listed Chinese companies (N-shares) will be included into their broad-based indices on December 1, 20151. Due to their U.S.–listing, these companies were previously excluded from MSCI’s definition of China within their broad-based international indices. There are trillions of dollars benchmarked to MSCI indices, so a change like the one set to happen on December 1, 2015 has the potential to cause a massive rebalance in the affected markets. Upon inclusion, China N-shares will represent 3.5% of the MSCI Emerging Market Index2.

Please note, MSCI’s China N-share inclusion is different from the Onshore China (A-share) inclusion we previously wrote about. The N-share inclusion process differs from A-share inclusion in that N-shares have a fixed and imminent inclusion date.

Total China N-share market cap is $487 billion3. KraneShares estimates that N-share inclusion will trigger $70 billion to be reallocated to China N-shares4; $35 billion on December 1st, 2015 and $35b on June 1st, 20165. The reallocation will increase total China N-share market cap by 14%6.

Our fund, the KraneShares CSI China Internet ETF (NASDAQ:KWEB) primarily consists of U.S.-listed Chinese companies. KWEB’s holdings cover 98% of the China N-share allocation slated to be included in the MSCI Emerging Market Index7. These 16 stocks represent a 63% weight of KWEB8.

We believe investors interested in capitalizing on the potential 14%+ increase in China N-share market cap should purchase KWEB now and hold until Aug 2016.

For your reference, we will include the China N-Share Countdown Clock in our weekly emails through June 2016 when the second phase of inclusion is complete.

  2. MSCI 2015 Market Classification Review, 10 Jun 2015, page 17
  3. Bloomberg, 25 Jun 2015
  4. Potential inclusion data calculated based off amount of assets benchmarked to affected indices by China weighting as of 3/31/2015
  5. MSCI email, “ Implementation of enhancements to the coverage to the MSCI Global Investable Market Indexes”, 12 Mar 2015
  6. $70 billion reallocated to China N-share ($70b) / total China N-share market cap ($487b) = 14%
  7. MSCI Provisional EM Proforma
  8. Based off KWEB holdings as of 6/24/2015