While the world's largest emerging markets ETF, the Vanguard
MSCI Emerging Markets Fund (NYSEArca:VWO), is letting go of its
MSCI benchmark for a competing FTSE index early next year, MSCI is
doing anything but conceding that perhaps its approach to indexing
emerging stocks might have its pitfalls.
To the contrary, the index provider released a comprehensive
white paper that details why the MSCI Emerging Markets Index and
broad-based emerging markets investing in general is "as relevant
At the heart of the matter is MSCI's inclusion of South Korea in
its emerging markets basket, a country that FTSE excludes from its
emerging markets index and one that many consider more developed
than developing. The results of MSCI's next classification review
will be released in June 2013.
Truth be told, when Vanguard first said early this month that it
would ditch 22 MSCI indexes for cheaper FTSE and CRSP benchmarks in
a process that shook up the world of indexing, it argued that the
decision to do so was primarily cost-driven. FTSE and CRSP were
offering credible indexes at a cheaper price.
'This is not about FTSE vs. MSCI,' Joel Dickson, a principal at
Vanguard's investor strategy group, said in a webinar hosted by
IndexUniverse on the recent deal Wednesday. 'It's about providing
high quality indexes in the most cost effective way.'
But the issue of Korea in the VWO portfolio quickly emerged, and
it's not a small matter given that roughly $9 billion of the $57
billion Vanguard ETF is tied to its Korea allocation. Other players
in the world of developing markets, notably Emerging Global
Advisors, have argued in their own white papers that investing in
Korea is more like investing in the U.S. than, say, Eastern
Still, in this paper, MSCI broadly speaks to the different ways
of approaching emerging market equities, even if nowhere in the
20-plus-page document does it mention its view on South Korea.
More broadly, the core of MSCI's argument is that it believes
that the nature of emerging market investing has changed in the
past 20 years, but its role in investors' long-term portfolio
allocations hasn't diminished.
"The changing nature of emerging markets means that the
investment rationale underpinning the mandate allocations and the
approaches to implementation have also evolved over time," MSCI
said in the paper, noting that many of these booming economies
offer dynamically changing landscapes as their markets expand and
as their financial markets grow deeper.
That changing landscape has meant that, by and large, emerging
markets have seen a rising correlation with developed economies,
making a current emerging markets allocation in a global portfolio
more growth-oriented than one that addresses broad needs for
"The motivation for investing in emerging markets 20 years ago
focused on gaining market exposure to an uncorrelated source of
equity growth premium and was arguably often seen as an allocation
outside the core portfolio," MSCI said. "Today, many investors are
seeing emerging markets as a core allocation in their
Losing VWO-as well as Vanguard's other 21 ETFs-was a costly
event for MSCI, which saw a disproportionate 25 percent of its
market capitalization evaporate over indexing agreements worth an
estimated $24 million a year, though the firm has annual revenue of
more than $900 million.
At the end of the day, MSCI is counseling investors to stick to
their knitting in terms of how they go about obtaining emerging
Yes, it agrees, strategies that either integrate developed and
emerging stocks into one pile or those that look to pick the
winners in the emerging markets space are gaining momentum with
That said, a broad-based approach to emerging markets-read the
MSCI Emerging Markets Index-is still a viable way to tap into the
developing world's growth premium.
A broad-based approach diversifies exposure across a constantly
changing economic landscape, but it also dispenses with the need to
pick winners, which is arguably a fool's errand.
"Investors today have many choices in how they allocate to
emerging markets," Brett Hammond, managing director and head of
MSCI Applied Index Research, said in a release that accompanied the
"However, we think that the broad-based emerging markets concept
based on the MSCI Emerging Markets Indices has been effective in
capturing growth in the segment while allowing investors to ride
the changes in the underlying sources of economic growth premium,"
Permalink | 'copy; Copyright 2009 IndexUniverse LLC. All rights
Don't forget to check IndexUniverse.com's ETF Data
2012 IndexUniverse LLC
. All Rights Reserved.