Traders have had bigger fish to fry over the past few days,
but a potentially noteworthy news event is slated for the
after-market docket on Tuesday.
That is when index provider MSCI (NYSE:
) unveils its annual market reclassification, an event that could
impact a raft of
tracking developing and frontier markets.
On the other hand, this even has the potential to be
as it was last year
when MSCI again declined to move South Korea and Taiwan to
developed market from emerging market status. To its credit, MSCI
does not take market reclassifications lightly.
The last time it changed a market's classification was in 2011
when it demoted Trinidad & Tobago to standalone from
frontier. The last time an ETF was affected by an MSCI
reclassification was May 2010 when
Israel promoted to developed from emerging
. It has taken a while, but the iShares MSCI Israel Capped
Investable Market Index Fund (NYSE:
) is finally close to getting back to where it traded after the
upgraded. Several months, later EIS surged only to enter a
multi-year tailspin after becoming a developed market ETF.
Here are some of the ETFs that could be in focus if MSCI
delivers some surprises on Tuesday.
iShares MSCI Emerging Markets Index Fund (NYSE:
) An obvious choice to be sure, but the second-largest emerging
markets ETF by assets allocated over 25 percent of its combined
weight to South Korea and Taiwan at the end of the first quarter.
Both have been inline for a promotion to developed market status
for several years and many investors believe that at the very
least South Korea should get the nod.
To this point, MSCI has declined, citing the fact that the
South Korean won is not easily convertible for offshore traders.
Arguably, it is a pedantic issue given that other emerging
markets featured in the MSCI Emerging Markets Index only have
partially convertible currencies. The Indian rupee is one
If MSCI does decide to promote South Korea, the move will
probably be met with some near-term hysteria, but Vanguard has
already shown the world that it is easy to move a major emerging
markets ETF away from South Korean stocks without causing a
panic. That is what the Vanguard FTSE Emerging Markets ETF (NYSE:
). Interestingly, the performance difference between EEM and VWO
is not significant this year.
Prediction: MSCI leaves both South Korea and Taiwan as
iShares MSCI Frontier 100 ETF (NYSE:
) Yes, it has already been said
that FM will be in play this week
, but with Qatar and the United Arab Emirates combining for
almost 28 percent of FM's weight at the end of the first quarter,
the advice bears repeating.
FM and other ETFs with even larger allocations to Qatar and
UAE, such as WisdomTree Middle East Dividend ETF (NASDAQ:
), have been stellar performers this year,
trouncing traditional emerging markets funds in
The impact of the MSCI news on FM, GULF and others will be
interesting to say the least. As is the case with South Korea's
"not yet" promotion to developed market status, some investors
believe UAE should have gotten the nod to emerging markets
territory long ago. MSCI has rejected Qatar and UAE five years in
a row. How long that dance can be kept up is anyone's guess, but
the index provider is running out of excuses, particularly with
Qatar recently took action to lift foreign ownership limits on
its major exchanges, but that news broke last week and it may not
be enough to appease MSCI this year, though it is a good move for
If UAE is promoted and Qatar is not, how FM rebalances will be
noteworthy as well. Educated guess: The ETF's weights to Nigeria,
Pakistan, Kazakhstan and Vietnam will increase. Prediction: UAE
gets the nod, but Qatar does not.
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