No Love For South Korea, Taiwan ETFs After Keeping EM Status


The two largest ETFs tracking South Korea and Taiwan are trading slightly lower Wednesday after index provider MSCI (NYSE:MSCI) opted to keep the two Asian nations as emerging markets in its annual markets reclassification.

South Korea and Taiwan retained their emerging markets status for a third consecutive year, but both remain under review for a possible promotion to developed market status next year, said MSCI.

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Shares of the iShares MSCI South Korea Capped Index Fund (NYSE:EWY) are off 0.22 percent at this writing while the iShares MSCI Taiwan Index Fund (NYSE:EWT) is down 0.4 percent on what is shaping up to be a mixed day for major emerging markets ETFs.

This is not the first time EWT and EWY have flirted with becoming developed market ETFs and MSCI is pointing to some familiar reasons for keeping the countries as emerging markets. The index provider acknowledge the "MSCI Korea Index continues to meet most of the developed markets criteria of MSCI Market Classification framework."

However, MSCI again pointed to the limited convertibility of the Korean won in offshore markets as a reason for keeping South Korea as an emerging market. Likewise, MSCI said the MSCI Taiwan Index "meets many Developed Markets criteria," but there are some issues holding Taiwan back as well.

MSCI cited the absence of an offshore market for the new Taiwan dollar, the lack of complete removal of prefunding practices on Taiwanese stocks and the difficulty in executing in-kind and off-exchange transactions.

EWY currently has $3.26 billion in assets under management while EWT has $2.7 billion. At 13 years old, each ETF is among the oldest country-specific emerging markets ETFs on the market today.

The MSCI news is also significant for investors in the iShares MSCI Emerging Markets Index Fund (NYSE:EEM), the second-largest emerging markets ETF, or any ETF or mutual fund that benchmarks to the MSCI Emerging Markets Index for that matter. South Korea and Taiwan are the second- and fourth-largest country weights in that index, combing for 26.5 percent of EEM's weight.

Had either or both been promoted to developed market status, EEM and funds that benchmark to the MSCI Emerging Markets Index would have had to sell South Korean and/or Taiwanese stocks. However, as Vanguard has proven, there is a way to drop South Korea from a major emerging markets ETF without upsetting markets.

Last year, Vanguard announced it was dropping the MSCI index for its emerging markets ETF, now the Vanguard FTSE Emerging Markets ETF (NYSE:VWO). FTSE views South Korea as a developed market and in January, Vanguard said it would track the FTSE Emerging Transition Index for approximately six months as VWO progressively reduced its exposure to South Korean stocks.

Even with the change, VWO and EEM have mirrored each other as both are down 9.2 percent in the past three months.

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