With the media frenzy surrounding the recent Alibaba IPO, leading global index providers also came under the spotlight as the e-commerce giant’s stock was notably absent from their indexes. Alibaba was not eligible for the FTSE Global Equity Index Series (GEIS) primarily due to its sole listing as an ADR, without an underlying ordinary share listing.
Listing structures like Alibaba’s raise questions regarding what country these securities can call home, and as such they’ve been aptly assigned the label of “orphan stocks.” Broadly, the term is used to describe any stock that is excluded from a global index due to listing structure and country of domicile issues. However, the definition of orphan stocks can vary among index providers, and such distinctions can result in material differences in index composition.
In FTSE’s Determining Nationality document, the rules that govern the nationality allocation of companies within FTSE indexes are clearly stated. An orphan stock is defined as a stock with only an ADR/GDR listing, with no associated underlying equity available. While these securities would be ineligible for FTSE GEIS inclusion, companies that have underlying share listings in locations outside of their country of domicile may in fact be eligible.
For example, Jardine Matheson Holdings and Hong Kong Land Holdings are both incorporated in Bermuda and listed in Singapore, but FTSE still recognizes that they are essentially Hong Kong companies and classifies them accordingly. They are therefore both constituents of the FTSE Large Cap Hong Kong index. This shows how FTSE’s methodology and governance, which includes input from market participants, reflects actual market realities as experienced by index users.
Other index providers may have broader or less clear definitions of orphan stocks, thereby resulting in a higher rate of exclusion. For instance, an index provider defining orphan stocks as companies with no local listing would not include Prada in its indexes, since the company is based in Italy but has only a listing in Hong Kong. As numerous large companies have listing structures similar to Jardine Matheson and Hong Kong Land, such differing definitions of orphan stocks could result in substantially different indexes among global index providers.
As part of FTSE’s ongoing commitment to provide clear and transparent index methodology rules, FTSE is continually reviewing all rules to ensure they meet the highest standards of the industry. Tradability has always been, and continues to be, a key driver in FTSE’s inclusion screening rules.
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