MSCI Inc., one of the largest providers of indexes for use by issuers of exchange traded funds, is considering capping the weights of two of the largest emerging markets in its major international equity indexes. Among the countries that could see their weights capped are Brazil and India, two of the largest developing economies.
“The two countries, along with Turkey and South Korea, are ‘potential future examples’ of markets whose weights could be capped on MSCI indexes, the New York-based company said in a presentation on its website Wednesday,” reports Bloomberg.
The iShares MSCI Emerging Markets ETF (NYSEArca: EEM), which tracks the MSCI Emerging Markets Index, currently allocates 15.55% of its weight to South Korea, the benchmark’s second-largest country weight behind China. India and Brazil combine for nearly 15 percent of that fund’s geographic exposure.
The four countries restrict the use of local data in derivatives created by offshore exchanges, putting them in violation of MSCI’s anti-competition clauses, according to Bloomberg.
All About Access for the MSCI ETF
India, Asia’s third-largest economy, also has burdensome requirements for foreign investors. News of MSCI’s examination of Brazil, India, South Korea and Turkey comes as the index provider is preparing to add China A-shares to the MSCI Emerging Markets Index.
“On May 31, MSCI will partially include about 233 China large-cap A shares in the MSCI Emerging Markets Index. Nearly $2 trillion tracks the regional index, representing over 85% of all emerging market equity fund assets,” according to MSCI.
India recently opened the Gujarat International Finance Tec-City, or GIFT City, and regulators are making it easier for international investors to trade securities there as part of the country’s efforts to bolster foreign investor accessibility. However, GIFT City is not yet a credible alternative to India’s established equity bourses.
MSCI is consulting with its clients on the matters of Brazil, India, South Korea and Turkey market access and plans to release the results of those consultations at the end of this year.
For more information on the developing economies, visit our emerging markets category.