Vanguard’s decision to change the tracking benchmark at Vanguard MSCI Emerging Markets (NYSEArca: VWO) to lower the fund’s costs means the ETF will be dropping its exposure to South Korea.

Vanguard’s plans to transition VWO to an index managed by FTSE will have an impact. South Korea has about a 16% weighting in MSCI’s emerging markets index, whereas South Korea is considered a developed market by FTSE, according to a recent report. [Vanguard Shift Puts Focus on ETF Benchmarks]

“Some investors are worried that South Korea is about to vanish—and it has nothing to do with tanks or communism,” reports Ian Salisbury at

Vanguard’s index switch, which was announced in early October, has ramifications for institutional investors that are benchmarked to MSCI indices. “More important, say critics, returns in the emerging-markets ETF could trail its peers if South Korean stocks continue to rise,” Salisbury writes.

Since the end of October, VWO has seen outflows of $886 million, according to IndexUniverse data. The iShares MSCI Emerging Markets (NYSEArca: EEM) has pulled in about $4.9 billion for the same period.

Vanguard points out that its emerging market fund, VWO, offers cost savings for investors and advisors. VWO has an expense ratio of 0.2% compared with 0.67% for EEM. BlackRock recently launched iShares Core MSCI Emerging Markets ETF (NYSEArca: IEMG), which has an expense ratio of 0.18%. [Vanguard Emerging Market ETF Sees Heavy Outflow]

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