CHICAGO, June 26, 2012 /PRNewswire/ -- Funds in this article include: Vanguard MSCI Emerging Markets ETF (VWO), iShares MSCI Emerging Markets Index Fund (EEM), EGShares Low Volatility Emerging Markets Dividend ETF (HILO), iShares MSCI BRIC Index Fund (BKF), EG Shares GEMS Composite ETF (AGEM). Eric Dutram looks at three ETFs which don't classify Taiwan or South Korea as emerging markets, potentially offering investors better emerging market exposure.
Get True Emerging Market Exposure with These Three ETFswritten by Eric Dutram of Zacks Investment Research:
Sometimes, the line between developed and emerging markets is razor thin. This has especially been the case for two of Asia's largest economies; Taiwan and South Korea.
These two nations represent some of the most robust economies in the region both from a total level and a per capita reading, but are often classified as 'emerging' by some of the major index firms. In particular, the indexing giant MSCI still classifies them as developing countries although other benchmark providers, such as Dow Jones, have moved these nations into the developed market club.
Some had hoped that MSCI would finally move up the two nations into developed market status at its annual review of country classifications, but both remained firmly in the emerging market camp according to the index provider. This forces these two countries to stay in the emerging market realm for another year, hoping that the company will come around on these two nations in 2013.
This annual rejection continues to surprise some in the industry as South Korea and Taiwan both have large markets that are much more diverse than many of their small peers that are already classified as industrialized nations (see Three Overlooked Emerging Market ETFs).
In fact, both of the nations have, according to the IMF, a higher GDP per capita (PPP) than the EU average, while both have exceptionally high rates of economic freedom and competitiveness that put many other 'industrialized' members to shame.
Why It Matters For ETF Investors
While this problem may not seem very important to most investors on the surface, it actually has a huge implication for emerging market ETF investors. Thanks to MSCI's refusal to put either of the countries in the developed market indexes, they have grown to make up an outsized percentage of some of America's most popular emerging market ETFs.
This includes two of the top ETFs on the market today both of which track the MSCI Emerging Markets Index. These two funds, the Vanguard MSCI Emerging Markets ETF (VWO) and the iShares MSCI Emerging Markets Index Fund (EEM) account for nearly $85 billion in AUM as well as the lion share of assets in the developing market ETF world (see Seven Biggest International Equity ETFs).
However, both of the funds, since they follow the MSCI methodology, have close to one-fourth of their assets in the combination of Taiwan and South Korea. This suggests that the products may not offer the 'truest' emerging market exposure and instead have a great deal of assets in companies from countries that are arguably developed and not emerging.
Ways to Avoid
Luckily for investors, there are a number of ways to avoid this issue thanks to the proliferation of emerging market ETFs. No more does the space consist of just MSCI based products giving investors a choice among over 50 ETFs that have assets exclusively in emerging nations (see more in the Zacks ETF Center).
Below, we highlight three of our favorite emerging market ETFs which offer no exposure to either Taiwan or South Korea. While both of these markets could make for fine investments, we don't believe that they should be treated as emerging by any means, suggesting that for better emerging market ETF exposure, the following ETFs should be considered instead:
For the rest of this ETF article, please visit Zacks.com at: http://www.zacks.com/stock/news/77622/get-true-emerging-market-exposure-with-these-three-etfs
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