A key topic for global investors today is whether Chinese A-Shares will be included in the popular MSCI Emerging Markets Index. Estimates suggest that about $1.7 trillion in assets track the popular index. CBOE offers a number of volatility and options products to help investors gauge and manage their global equity exposure.
Last month MSCI Inc. issued a press release with an announcement that it –
“… will release on June 9, 2015, shortly after 11:00 p.m. Central European Summer Time (CEST), on its website www.msci.com, the results of the 2015 Annual Market Classification Review. As a reminder, only the proposal to partially include China A shares into Emerging Markets is currently included on the review list of the 2015 Annual Market Classification Review.”
Due to the far-reaching impact to global investors, this story of MSCI’s classification review has been widely covered by the financial media, including the articles cited below.
- 5 Things to Know About MSCI Considering Inclusion of Chinese A-Shares in Its Benchmarks (From: WSJ Blog, which noted that – “MSCI estimates that a decision to add a sprinkling of A-shares to its Emerging Markets Index would lure $20 billion to China’s markets, rising over time to $400 billion”);
- China Entry to MSCI Poses Risks for Investors Seeking Diversity (From: Bloomberg, which noted that – “Hong Kong-listed Chinese companies, along with those in South Korea and Taiwan, make up more than half of the 23-country benchmark.”);
- Will China’s stock market explode on Wednesday? (From: Marketwatch).
- Which China Stocks Win If MSCI Says Yes? (From: Barron’s, which noted that – “The Shanghai Composite Index has rallied nearly 70% since last November … So imagine what USD330 billion of fresh inflows could mean for China’s A-share market. That’s the amount of foreign money that could flow into the mainland China stock market if index provider MSCI fully includes A-shares into its Emerging Markets Index …”)
COUNTRY WEIGHTS IN MSCI EMERGING MARKETS INDEX
If and when Chinese A-Shares are included in the MXEF Index, the country weightings in the index could experience significant changes. The chart below shows the weightings at the end of May for the MMXEF Index, which had a total capitalization of $4 trillion, with 833 constituent stocks from 23 countries.
PRICE CHART FOR MXEF INDEX
VOLATILITY INDEXES – VXFXI AND VXEEM
Key gauges of overseas markets sentiment that are updated real-time during U.S. trading hours include the CBOE China ETF Volatility Index (VXFXI) (which closed at 32.29 on June 8) and the CBOE Emerging Markets ETF Volatility Index (VXEEM) (which rose 30% the last 11 trading days).
FEATURES OF THE NEW OPTIONS ON MSCI INDEXES
CBOE recently launched options on the MSCI EAFE Index and MSCI Emerging Markets Index. While the open interest for these contracts has been low (in part because only one expiration was offered at the contract launch), several investors see promising long-term prospects and potential for the contracts. Key features of the new global index options include —
- Efficiency with large contract size – cash-settled options on the MSCI indexes have a $100 multiplier and a notional size that is about 30 times larger than the options on the EFA and EEM ETFs.
- Simplicity – achieve broad-market exposure in one trade, as options on MSCI options offer investors tools with the potential to adjust exposure to the global markets at a fraction of the cost of buying individual stocks and ETFs
- Cash settlement – with no unwanted delivery of stocks or ETFs
- Predetermined risk for option buyers – index option purchasers risk only the premium they pay for the option. The risk is both known and limited.
- European-style exercise – which protects option sellers against assignment prior to expiration (so-called “early assignment”)
To learn more about managing global equity exposures and the new CBOE options on MSCI indexes, please visit www.cboe.com/MSCI.