The problem with emerging markets is that eventually, most of them grow up and not everyone agrees on what defines “grown up.” As billions continue to pour into emerging market exchange traded funds (ETFs), it’s becoming more and more urgent to answer the question.
The two leading emerging market ETFs Vanguard Emerging Markets ETF (NYSEArca: VWO) and iShares MSCI Emerging Markets Index (NYSEArca: EEM) are both based on the MSCI Emerging Markets Index, which include Israel, Korea and Taiwan, reports Olivier Ludwig for IndexUniverse. MSCI Barra has stated that Korea and Taiwan will stay in the MSCI Index until mid-2011 and Israel will be removed in late spring. The three countries make up around 25% of the total weighting in VWO and EEM.
EEM has 476 holdings and an expense ratio of 0.72%. VWO has 800 holdings and an expense ratio of 0.27%.
Emerging Global Advisors has based its emerging market ETF, EGA Emerging Global Shares Dow (NYSEArca: EEG), on the Dow Jones Emerging Markets Titans Index, which doesn’t include Israel, Korea and Taiwan. In fact, Emerging Global Advisors has stated that they pride themselves on the pure emerging market exposure contained in their funds. The SPDR S&P Emerging Markets (NYSEArca: GMM), based on the S&P Emerging BMI Index, is another emerging market ETF option that excludes Korea, but it includes Taiwan and Israel.
EEG holds 83 of the largest companies and has an expense ratio of 1.10%. GMM has 508 holdings and an expense ratio of 0.59%. [Indonesia ETF: Destined for Greatness in 2010?]
Richard Kang, chief investment officer at Emerging Global, commented that the three countries all have per capita GDP of more than $20,000 a year and include established middle classes. The International Monetary Fund (IMF) has disqualified the three countries as emerging markets based on those two criteria. [Emerging Market ETFs: High Growth Equals High Returns?]
What does it mean for you? If you’re concerned about getting pure emerging market exposure, educate yourself on where the various indexers stand on the matter and what the funds own. Many funds classified as having emerging market exposure do, in fact, hold markets that many would consider to be developed. [The Top 10 ETFs Investors Are Trading.]
For more information on emerging markets, visit our emerging markets category.
Max Chen contributed to this article.