The MSCI Emerging Markets Index that VWO is abandoning has a 15 percent South Korea weighting, while the FTSE Emerging Index doesn’t have any at all, as FTSE doesn’t classify South Korea as an emerging market.
Investors in Vanguard funds after the index transitioning is complete will get their South Korea exposure via what is now called the Vanguard MSCI EAFE ETF (NYSEArca: VEA), a fund focused on the developed world outside of North America.
VEA currently has no South Korea allocation, as MSCI doesn’t yet classify South Korea as a developed market, and, when it shifts to a FTSE index sometime soon, it will have a South Korea weighting around 2 percent.
How much Korea exposure investors will hold after the index changes would depend on how much of an allocation to VEA they have but, at first blush, it appears that many investors are likely to have less South Korea exposure via the new VEA with a FTSE index than via the old VWO that used the MSCI index.
That prospect of being underweight Korea, plus the reluctance of institutional investors to move away—even on a single fund like VWO—from MSCI benchmarks, has fueled significant inflows into the iShares MSCI Emerging Markets Index Fund (NYSEArca: EEM).
The flows into EEM, which by and large are not coming from VWO, have made EEM a much more popular developed-markets ETF than VWO since Vanguard announced the index change in early October.