Through the changes, VWO will be the first broad market-cap-weighted index fund to include both all-cap exposure and China A-shares as the ETF moves toward a more inclusive market-cap weighted methodology. While current index-based emerging market funds include a heavy tilt toward China, most offerings only track Chinese H-shares that are listed in Hong Kong or Chinese companies listed in the U.S. Consequently, with the inclusion of Chinese A-shares, China’s domestic markets may play a more direct role in investors’ portfolios.
“As the first major emerging markets fund to add exposure to China A-shares, the fund will benefit investors with more diversification, deeper emerging markets exposure, and greater access to the growth potential of Chinese equities,” Vanguard CEO Bill McNabb said in a press release.
In contrast, the iShares MSCI Emerging Markets ETF (NYSEArca: EEM), which tracks an MSCI index, has stated not moved to add China A-shares to the benchmark MSCI Emerging Markets Index, but MSCI has hinted that it will move to include Chinese mainland stocks.
Another big difference between EEM and VWO is South Korea. FTSE Russell considers Asia’s fourth-largest economy a developed market while MSCI sees it as an emerging economy. In fact, MSCI has pulled South Korea from the list of candidates for a potential promotion to developed markets status. EEM allocates over 16% of its weight to South Korea while VWO has no exposure to the country.
For more information on ETF index methodologies, visit our indexing category.
Max Chen contributed to this article.