By now, most ETF investors probably know that the Vanguard
MSCI Emerging Markets ETF (NYSE:
), the largest emerging markets ETF by assets, will drop the MSCI
index it currently uses in favor of an equivalent index from FTSE
The change, scheduled to take place next year, is noteworthy
for several reasons. Already the dominant brand among low-cost
and mutual funds, Vanguard believes the index switch will lower
investors' costs further. VWO currently charges a scant 0.2
percent per year, making it less expensive than 87 percent of
according to Vanguard data
Another important aspect of this looming index swap is South
Korea. As in the MSCI Emerging Markets Index classifies South
Korea as a developing nation. The FTSE Emerging Markets Index
does not, meaning
VWO will part ways with South Korean equities
such as Samsung and Kia.
At the end of October, South Korea accounted for 15.3 percent
of VWO's country weight. How the ensuing loss of South Korean
stocks along with increased exposure to Brazilian and Chinese
stocks impacts VWO remains to be seen.
However, there is at least one multi-country emerging markets
ETF with an established track record that does not feature
exposure to South Korea: The SPDR S&P Emerging Markets ETF
). Arguably obscure relative to ETFs such as VWO and the iShares
MSCI Emerging Markets ETF, the SPDR S&P Emerging Markets ETF
has been around for nearly six years and has almost $167 million
in assets under management.
GMM tracks the S&P Emerging BMI Index (STBMEMU), which
like the aforementioned FTSE index, does not classify South Korea
as a developing nation. Year-to-date and over the past 12 months,
GMM has almost performed inline with VWO, indicating that over
shorter time horizons, there is not a major performance gap
simply because South Korea is present in one ETF and not the
However, since GMM debuted in March 2007, the fund has
returned just 12.8 percent. That compares to a 117.3 percent gain
for VWO. To be sure, that entire performance gap cannot be
attributed to GMM's lack of South Korea exposure. For starters,
S&P promoted South Korea to developed market states after GMM
Additionally, the iShares MSCI South Korea Index Fund (NYSE:
) is up about 19 percent since GMM came to market. A decent
performance for South Korean equities for certain, but not enough
for GMM to have noticeably closed the gap on VWO assuming the
former had held South Korean stocks for all of its existence.
Investors should also note the S&P Emerging BMI Index and
the FTSE Emerging Markets Index are not identical twins. Second
cousins would be the more appropriate family analogy for the two
indexes. For some of the pair's bit components, there are rough
similarities when it comes to weightings.
For example, the FTSE index devotes about 1.1 percent of its
weight to the Philippines
and 1.5 percent to Poland
. GMM's allocations to those two
countries is 1.22 percent to each
. The two indexes also share comparable exposure to Chile, Turkey
and Thailand, among others.
Another interesting aspect to the comparison is that GMM's
current combined exposure to China and Brazil is about 33.8
percent. The FTSE Emerging Markets Index devotes about 33.2
percent to that pair, but with a lower weight to China and a
larger allocation to Brazil than is found in GMM.
Arguably, VWO's looming increased weight to Brazil, not its
loss of South Korean stocks, could be the bigger source of
concern. As EWY's five-year returns highlight, South Korea is not
the primary reason VWO surged. Nor is it the reason GMM
However, Brazil is by far the weakest link
in the BRIC chain at the moment
. VWO's index switch means increased Brazilian exposure to the
tune of about 275 basis points to almost 15.3 percent from 12.5
percent with the MSCI index.
The good news for VWO shareholders is that Chinese stocks are
bouncing back and the ETF will see its exposure to the world's
second-largest economy ratcheted up when the index change is
The bottom line here is that GMM, while not a carbon copy of
VWO by any means, does give investors some basis for how a
multi-country ETF that has no South Korea exposure performs.
Still, those considering a new position in VWO and those mulling
a possible sale of an existing stake should study the
the extensive track record of the FTSE Emerging
, which has been pretty solid over the past 12 and 36 months.
For more on VWO's index change, click
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