MSCI Index Change Would Have Big ETF Impact

October 08, 2014

It seems the Alibaba IPO was simply too big for index providers to ignore.

Roughly two weeks before Alibaba’s initial public offering (IPO), MSCI suddenly announced a consultation with investors, proposing to include what I call “misfit” stocks into its flagship Global Investable Market Index (GIMI) series.

By “misfit,” I mean companies like Alibaba and Baidu, which incorporate and list their shares outside of their home countries, thereby making themselves ineligible for inclusion into MSCI’s GIMI series.

Investors have until Nov. 28 to provide feedback, at which time MSCI will decide whether to proceed with its proposal.

Well Beyond Alibaba

While Alibaba’s been all the focus here, this proposal has broader implications for MSCI’s GIMI series far beyond the inclusion of just Alibaba.

If the proposal passes, a slew of Chinese and Russian companies, along with other “misfit” securities previously ineligible for inclusion in major MSCI indexes, are set to be added to ETFs with billions of assets in management tied to them. Not least among the funds such a change could affect is the $38 billion iShares MSCI Emerging Markets ETF (EEM | B-97).

As it stands now, most MSCI-based, U.S.-listed ETFs track indexes derived from MSCI’s GIMI series, so they follow the GIMI methodology.

Finally, if MSCI’s proposal comes to fruition, I question whether FTSE will follow suit and propose similar changes to its Global Equity Index series, which can impact ETFs like the $46 billion Vanguard FTSE Emerging Markets ETF (VWO | C-89).

China Implications

Some of the biggest changes are expected around Chinese equities. There are currently many significant and influential companies that are ineligible for inclusion into MSCI’s GIMI Indexes.

If the proposal passes, for example, Alibaba and other major Internet firms like Baidu, and would become eligible, along with a host of U.S.-listed Chinese solar, consumer and health care companies.

According to MSCI, 21 additional Chinese companies would become eligible.


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