Vanguard has gazumped MSCI and FTSE/Russell by moving to directly include China A shares in its emerging markets ETF products and strategies. The two index companies vacillated in their latest deliberations.
The news from Vanguard, which is not known for aggressive marketing positions with new products or strategies, offers nimble investors a prime opportunity to get set in China before MSCI and FTSE finally include China A shares (Shanghai market) in their emerging markets indices, probably next year.
Z-Ben Advisors, a Shanghai-based research firm specializing in funds management, interpreted Vanguard’s initiative as “looking to take first blood in the battle for EM (emerging market) ETF flows”. Z-Ben said that Vanguard’s primary competitor in the growing market, BlackRock, which uses MSCI for its iShares emerging markets ETF, would have to determine what, if any, action would be needed in response.
A week later, MSCI announced after its annual review – as FTSE had done two weeks earlier – that it would not be doing anything anytime soon, except having further talks with Chinese regulators with a view to moving towards a gradual inclusion of the shares of the world’s second-largest economy in its indices.
As one Hong Kong-based fund manager said: “It’s a case of the genuine investors moving in step with the market while the industry’s infrastructure tries, not very hard, to catch up.”
In its analysis, Z-Ben says that the three main foreign-owned ETF providers in China – BlackRock, Vanguard and State Street – took “widely different” approaches to building access channels to China A shares. What that means is that they each put different emphasis on QFII quotas, RQFII and the new Shanghai-Hong Kong Stock Connect. Vanguard is the biggest with RMB 10 billion (about A$4.8 billion) in RQFII, BlackRock second with RMB 9.4 billion spread across RQFII and QFII, and State Street with RMB 1.3 billion in RQFII and QFII.
Interestingly, State Street built the first ETF in China, in the 2000s, for its client China Asset Management, which is the largest funds management firm in China.