When Are Emerging Markets Not Emerging Anymore?

March 17, 2010

South Korean companies make up the third-biggest country holding for Vanguard’s VWO, at 12.1 percent; Taiwan is No. 4 with 11.4 percent and
Israel is ninth with 4.0 percent. Korea is EEM’s second-biggest country holding, at 12.3 percent; Taiwan is fourth, at 10.5 percent and
Israel
is tenth, at 3.4 percent.

Both ETFs were among the 10 biggest U.S. ETFs by size at the end of February, according to data from the National Stock Exchange. EEM, the oldest among competing emerging market ETFs, was third-biggest, at $33.40 billion, compared with $20.10 billion for VWO, which was seventh-largest. Emerging Global’s EEG, which launched in July 2009, has gathered about $29.1 million in assets. SSgA’s GMM has attracted about $134 million since its rollout almost three years ago.

San Francisco-based iShares’ EMM has 476 holdings, compared with more than 800 for VWO, the result of so-called optimization by the iShares fund aimed at achieving investment exposure similar to the index, but with a fraction of the positions. Emerging Global’s EEG currently focuses on the largest companies and has 83 positions. It has a net expense ratio of 0.75  percent compared with 0.72 percent for EEM and 0.27 percent for VWO.

Investors’ Opinions Matter

As it reviewed Israel, Korea and
Taiwan
last year, MSCI Barra talked to investors to solicit their opinions on whether they considered these countries to be as investable as some of the weaker developed markets.

Israel elicited no concerns apart from short settlement cycles on the Tel Aviv Stock Exchange, while Korea and
Taiwan
failed to pass muster as developed markets for MSCI Barra.

“Therefore it was straightforward at that point to announce
Israel
’s transition into a developed market,” Nielsen said in a telephone interview.

“It’s more administratively difficult for foreign investors to work within the Korean or
Taiwan
markets,” he added. Nielsen stressed that in both countries, the lack of offshore currency markets as well as difficulties in setting up so-called omnibus accounts for fund companies to centralize all their bookkeeping were major drawbacks. “At the same time, these markets over the past couple of years have made major progress.”

MSCI Barra gives investors and fund companies a year to digest any status-change decisions. It announced the decision on Israel last year, and any status changes to Korea or
Taiwan
won’t be announced until June of this year, Nielsen said. He declined to speculate about the outcome of MSCI Barra’s reviews on Korea and
Taiwan.

“It’s all about the investability and accessibility from a foreign investor's perspective.”

 

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