The two largest
tracking South Korea and Taiwan are trading slightly lower
Wednesday after index provider MSCI (NYSE:
) opted to keep the two Asian nations as emerging markets in its
annual markets reclassification.
South Korea and Taiwan retained their emerging markets status
for a third consecutive year, but both remain under review for a
possible promotion to developed market status next year, said
Shares of the iShares MSCI South Korea Capped Index Fund
) are off 0.22 percent at this writing while the iShares MSCI
Taiwan Index Fund (NYSE:
) is down 0.4 percent on what is shaping up to be a mixed day for
major emerging markets ETFs.
This is not the first time EWT and EWY have flirted with
becoming developed market ETFs
and MSCI is pointing to some familiar reasons
for keeping the countries as emerging markets. The index provider
acknowledge the "MSCI Korea Index continues to meet most of the
developed markets criteria of MSCI Market Classification
However, MSCI again pointed to the
limited convertibility of the Korean won
in offshore markets as a reason for keeping South Korea as an
emerging market. Likewise, MSCI said the MSCI Taiwan Index "meets
many Developed Markets criteria," but there are some issues
holding Taiwan back as well.
MSCI cited the absence of an offshore market for the new
Taiwan dollar, the lack of complete removal of prefunding
practices on Taiwanese stocks and the difficulty in executing
in-kind and off-exchange transactions.
EWY currently has $3.26 billion in assets under management
while EWT has $2.7 billion. At 13 years old, each ETF is among
the oldest country-specific emerging markets ETFs on the market
The MSCI news is also significant for investors in the iShares
MSCI Emerging Markets Index Fund (NYSE:
), the second-largest emerging markets ETF, or any ETF or mutual
fund that benchmarks to the MSCI Emerging Markets Index for that
matter. South Korea and Taiwan are the second- and fourth-largest
country weights in that index, combing for 26.5 percent of EEM's
Had either or both been promoted to developed market status,
EEM and funds that benchmark to the MSCI Emerging Markets Index
would have had to sell South Korean and/or Taiwanese stocks.
as Vanguard has proven
, there is a way to drop South Korea from a major emerging
markets ETF without upsetting markets.
Last year, Vanguard announced it was dropping the MSCI index
for its emerging markets ETF, now the Vanguard FTSE Emerging
Markets ETF (NYSE:
). FTSE views South Korea as a developed market and in January,
Vanguard said it would track the FTSE Emerging Transition Index
for approximately six months as VWO progressively reduced its
exposure to South Korean stocks.
Even with the change, VWO and EEM have mirrored each other as
both are down 9.2 percent in the past three months.
For more on ETFs, click
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