My friend Brendan Ahern at KraneShares sometimes describes himself as an “index nerd.”
It’s incredibly dry reading. But Brendan discovers some extraordinary stuff in there…
His latest discovery is what’s about to happen to what he calls China’s “index orphans.” And it could mean billions of dollars are about to flow into a handful of Chinese stocks in the coming months.
Let me explain…
An index orphan is a huge company that isn’t part of a benchmark index yet. When it gets adopted by a major index, a ton of money flows into the stock.
It’s a technical point – but it means real money. Chinese tech giant Alibaba (BABA) is a great example.
Alibaba is the sixth-largest company in the world by market value, with a market cap of more than $400 billion. (It’s the largest non-U.S. public company in the world.)
But as Brendan explained to me recently, Alibaba is missing from some of the major indexes.
It trades in the U.S. But it isn’t a part of the U.S. benchmark S&P 500 Index because it isn’t a U.S. company.
So where does it belong?
The world’s second-largest index provider has the answer…
FTSE Russell currently doesn’t include U.S.-listed Chinese companies in its China indexes. But that’s about to change.
According to Brendan, FTSE Russell is about to include companies like Alibaba in its China indexes, its emerging markets indexes, and its global indexes.
This is a big deal…
As Brendan explained to me, the largest emerging markets exchange-traded fund – the Vanguard FTSE Emerging Markets Fund (VWO) – has about $80 billion in assets. Its largest holding is Tencent (TCEHY), with roughly $3.5 billion worth of Tencent shares (a weighting of almost 4.5%).
“Because Alibaba is roughly the same size as Tencent, the Vanguard index fund ought to have to buy roughly the same amount as Tencent,” Brendan explained.
If he’s right, that’s $3.5 billion that will have to flow into Alibaba – all because of one buyer.
But it’s not just the Vanguard FTSE Emerging Markets Fund…
The Vanguard Total International Stock Fund (VXUS) is almost FOUR TIMES the size of VWO – with roughly $300 billion in assets. Tencent is one of the top five holdings in this fund. This fund holds about $2.7 billion of Tencent. Therefore, Brendan says this fund will have to buy about $2.7 billion worth of Alibaba.
That’s $6.2 billion that will have to flow into Alibaba – in just two funds.
The story is much bigger here, too…
Longtime DailyWealth readers know I’ve written a lot about MSCI’s recent decision to include local Chinese stocks in its benchmark emerging markets index. That will mean hundreds of billions of dollars flowing into China’s local stock market.
I expect more and more of these index inclusions over the next few years. That means more and more money will flow into China. And that’s one big reason why I remain bullish on Chinese stocks over the long term.
Make sure you have your money there first.
Source: Daily Wealth