Skip to main content

You are here

Blog Listing Page

“Orphan stocks” treatment raises questions about index methodology

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.  



© 2015 London Stock Exchange Group companies.

London Stock Exchange Group companies includes FTSE International Limited (“FTSE”), Frank Russell Company (“Russell”), MTS Next Limited (“MTS”), and FTSE TMX Global Debt Capital Markets Inc (“FTSE TMX”). All rights reserved.

“FTSE®”, “Russell®”, “MTS®”, “FTSE TMX®” and “FTSE Russell” and other service marks and trademarks related to the FTSE or Russell indexes are trademarks of the London Stock Exchange Group companies and are used by FTSE, MTS, FTSE TMX and Russell under license.

All information is provided for information purposes only. Every effort is made to ensure that all information given in this publication is accurate, but no responsibility or liability can be accepted by the London Stock Exchange Group companies nor its licensors for any errors or for any loss from use of this publication.

Neither the London Stock Exchange Group companies nor any of their licensors make any claim, prediction, warranty or representation whatsoever, expressly or impliedly, either as to the results to be obtained from the use of the FTSE Russell Indexes or the fitness or suitability of the FTSE Russell Indexes for any particular purpose to which they might be put.

The London Stock Exchange Group companies do not provide investment advice and nothing in this communication should be taken as constituting financial or investment advice. The London Stock Exchange Group companies make no representation regarding the advisability of investing in any asset. A decision to invest in any such asset should not be made in reliance on any information herein. Indexes cannot be invested in directly. Inclusion of an asset in an index is not a recommendation to buy, sell or hold that asset. The general information contained in this publication should not be acted upon without obtaining specific legal, tax, and investment advice from a licensed professional.

No part of this information may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior written permission of the London Stock Exchange Group companies. Distribution of the London Stock Exchange Group companies’ index values and the use of their indexes to create financial products require a license with FTSE, FTSE TMX, MTS and/or Russell and/or its licensors.

Past performance is no guarantee of future results. Charts and graphs are provided for illustrative purposes only. Index returns shown may not represent the results of the actual trading of investable assets. Certain returns shown may reflect back-tested performance. All performance presented prior to the index inception date is back-tested performance. Back-tested performance is not actual performance, but is hypothetical. The back-test calculations are based on the same methodology that was in effect when the index was officially launched. However, back-tested data may reflect the application of the index methodology with the benefit of hindsight, and the historic calculations of an index may change from month to month based on revisions to the underlying economic data used in the calculation of the index.


Blog Listing Page