If you think this concern is misplaced, think again. Earlier this year, Kangmei Pharmaceutical, a Chinese company included in MSCI indexes, had over $4.4 billion go “missing.” While the company called it an “accounting error,” China’s late-to-the-party regulator called it a “premeditated and malicious cheating of investors.” How many more of these companies will have their cash go missing when the CCP determines their useful life has come to an end? As more frauds emerge, it will be America’s mom-and-pop investors who get stuck holding the bag, with limited legal recourse. It defies logic to think that retail investors are exposed to this type of risk 11 years after a financial crisis triggered by asset-backed securities filled with fraudulent mortgages.
Incredibly, the diligence failure doesn’t stop there. As if ignoring the risk of fraud isn’t bad enough, the indexes also include companies placed on the U.S. government Entity List and OFAC Sanctions List. This generally happens when a company is “acting contrary to the national security or foreign policy interests of the United States” or is a “threat to the national security, foreign policy or economy of the U.S.” Yet, American investor money continues to flow into these companies. Does that make sense to anyone, except those profiting from it? Do Americans even know that when they buy a global index ETF they could be investing in adversarial state-controlled companies like Rosneft, Gazprom, ZTE, Hikvision, or Aviation Industry Corporation of China?