These ETFs Could Benefit as VWO Changes Indexes

Tuesday brought arguably the biggest ETF news of 2012 when Vanguard announced it would drop indexes managed by MSCI (NYSE:MSCI) on 22 of its ETFs. The move not only rocked shares of MSCI, but it represented a stark departure from Vanguard's previously cordial relationship with MSCI.

The marquee Vanguard ETF parting ways with an MSCI index is the Vanguard Emerging Markets ETF(NYSE:VWO). VWO, the largest emerging markets ETF. VWO will part ways with the MSCI Emerging Markets Index in favor of the FTSE Emerging Markets Index, in what the U.K.-based FTSE Group is calling the largest largest international index switch on record.

There are stark differences between the two indexes, chief among them is that MSCI still views South Korea as a developing market, but FTSE does not. For that matter, neither does the International Monetary Fund and the World Bank.

That means South Korea is not found in the FTSE Emerging Markets Index. However, the country receives an allocation of 15.4 percent in the iShares MSCI Emerging Markets Index Fund (NYSE: EEM), the second-largest emerging markets ETF.

With this news, there is an interesting angle astute investors need to be aware of. The $67 billion VWO will have to sell South Korean equities, something Vanguard has promised to do gradually, to buy stocks of companies domiciled in the markets represented in the FTSE index.

China and Brazil account for almost 33 percent of the FTSE index's weight, but it is that index's allocations to other markets that could benefit some existing ETFs as Vanguard and other foreign investors start snatching up stocks in those nations.

WisdomTree India Earnings ETF (NYSE:EPI)

Indian equities have been drawing plenty of praise as of late, and EPI along with rival funds have responded with stellar gains.

The appearance of India on this list may surprise some, but consider this: It is Asia's third-largest economy, but accounts for just seven percent of EEM's weight. FTSE allocates 9.6 percent to India in its emerging markets index and that difference is significant enough to make a near-term pop in Indian stocks a reasonable bet.

iShares MSCI Malaysia Index Fund (NYSE:EWM)

EWM has been a solid performer this year, gaining almost 11 percent. Not to mention the fund has a surprisingly robust dividend yield of 3.62 percent. Malaysia is not yet ready to be a major part of ETFs such as EEM and VWO, but the country accounts for just 3.6 percent of EEM's weight. On the other hand, the FTSE index devotes almost 4.9 percent of its weight to EWM.

iShares Chile Investable Market Index Fund (NYSE:ECH)

There is already a lot to like about the Chilean economy. A sound banking system, solid GDP growth and a favorable political environment are chief among Chile's strong suits.

Of course, Chile is not Brazil in terms of economic heft. That means the former does not get a lot of love in ETFs like EEM, where it represents just 1.88 percent of the fund's weight. FTSE treats Chile a little bit, providing a 2.5 percent weight to the country. That is a big jump and a potential catalyst for ECH and Chilean equities.

WisdomTree Middle East Dividend Fund (NASDAQ:GULF)

This one is straightforward. The United Arab Emirates is nowhere to be found in EEM, but it does represent 0.34 percent of the FTSE Emerging Markets Index. That may not sound like much, but something is better than nothing. Along those lines, it is worth noting the WisdomTree Middle East Dividend Fund devotes almost 30 percent of its weight to UAE.

For more on the VWO index switch, click here.