What’s an emerging market, anyway?
Since the term lacks a cut-and-dried definition, the answer very much depends on whom you ask. Some, such as Citywire RIA inclusion columnist Sloane Ortel, even suggest that the vagueness of the term makes it useless at best, offensive at worst.
The question is not simply academic. Index providers’ differing classifications can translate into significant performance disparities for ETF investors.
Take the case of South Korea, which is the tenth largest economy in the world and has the fourteenth largest stock market by market capitalization. S&P Dow Jones Indices has classified South Korea as a developed market for the past two decades. FTSE ‘promoted’ South Korea from an emerging market to a developed market in 2009. But MSCI continues to classify South Korea as an emerging market, citing structural factors such as the lack of an offshore currency market and issues with corporate disclosures, as well as the country’s recent ban on short selling.
As a result of these differing views, two similar-looking $80bn ETFs are actually composed quite differently. The iShares Core MSCI Emerging Markets ETF (IEMG), has a 14% exposure to Korean stocks, while the Vanguard FTSE Emerging Markets ETF (VWO) has none.
The differences, of course, do not stop there. The Vanguard fund’s lack of Korea exposure means that relative to IEMG, ‘VWO has more exposure to China, Taiwan and India,’ pointed out Todd Rosenbluth, head…