Chart Of The Week: Ever Changing EM Index

Emerging market equities have been popular among ETF investors for a long time. The iShares MSCI Emerging Markets ETF (EEM) came to market more than 18 years ago, and even though it’s an expensive fund, it has nearly $31 billion in assets under management.

Its sister ETF, the iShares Core MSCI Emerging Markets ETF (IEMG), which launched in 2012 with a cheaper annual expense ratio—0.11% versus EEM’s 0.70%—now competes with the Vanguard FTSE Emerging Markets ETF (VWO) as the largest emerging market equity ETF. Today, IEMG and VWO have assets under management of just over $80 billion each.

IEMG tracks the MSCI Emerging Markets Investable Market Index, another flavor of the venerable MSCI Emerging Markets Index that EEM adheres to. IEMG’s index is more comprehensive thanks to its inclusion of small caps.

The MSCI Emerging Markets Index is arguably the most recognizable emerging market index among investors. Less recognizable, however, is the makeup of the index over time.

Today, investors are probably not surprised to hear that China is the largest weighting in the index, at 34%. But 10 years ago, China’s weighting way only half that, and in 2003, when EEM launched, it was a mere 7%.

In contrast, Mexico’s proportion of the index has fallen from 8% to 2%, and South Africa’s has fallen from 9% to 4%.

There are clear explanations for China’s rising weighting—from the relaxation of restrictions on ownership of Chinese stocks to the inclusion of mainland equities into the MSCI EM index to the surge in the value of China’s stock market—together these factors have driven China to represent more than a third of the MSCI Emerging Markets Index.

What the makeup of the index is next year or five years from now is anyone’s guess. Will China still dominate the index as you would expect, given the size of its market, or will geopolitical concerns play a part in driving the country’s weighting down from here?

The MSCI Emerging Markets Index is one of the most dynamic indices, so investors should frequently look under the hood to see what they are really buying.

Email Sumit Roy at [email protected] or follow him on Twitter sumitroy2