EM ETFs Overweight Countries That Are Close To Developed | ETF Trends

Broad emerging market index-based exchange traded funds may be overexposed to developing countries that are arguably more mature and more correlated with developed economies.

For instance, the iShares MSCI Emerging Markets ETF (NYSEArca: EEM) and Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO) include a heavy allocation in “mature” emerging economies, writes Tim Atwill, managing director, investment strategy, at Parametric, for InvestmentNews. [Emerging Market ETFs: Cheap Valuations But Monitor Your Trades]

Specifically, EEM’s top country weights include China 18.4%, South Korea 14.3%, Taiwan 11.9%, Brazil 11.3% and South Africa 7.4%. VWO top allocations include China 21.5%, Taiwan 13.7%, Brazil 12.5%, India 11.1% and South Africa 9.0%.

Many consider both Taiwan and Korea as almost completely developed. FTSE Index has upgraded South Korea to developed status, and VWO, which tracks an FTSE Index, does not include Korea among its country weights.

Atwill argues that investing in emerging markets should help investors diversify a portfolio. However, major emerging market indices include heavy exposure to countries that are arguably on the verge of becoming developed.

“This means these countries are much further along their economic growth path than the smaller, less mature emerging economies,” Atwill said. “This results in expected growth rates much closer to the developed world than their less developed, emerging peers.”