Tuesday brought arguably the biggest ETF news of 2012 when
Vanguard announced it would drop indexes managed by MSCI (NYSE:
) 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, 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
iShares MSCI Emerging Markets Index Fund
), 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
WisdomTree India Earnings ETF (NYSE:
Indian equities have been drawing
plenty of praise as of late
, and EPI along with rival funds have responded with stellar
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 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:
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
WisdomTree Middle East Dividend Fund (NASDAQ:
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
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