Emerging Market ETFs In Focus On MSCI Index Review - ETF News And Commentary

MSCI

has recently shook the market by announcing a 2014 Annual classification review which denies entry of China A-shares to its emerging market index. Several checks in investing in China A‐shares compelled MSCI to issue this decision. Per MSCI, the present quota is too limited to deserve an insertion into the conventional index at this moment (read:

).

Investors should note that A Shares are defined as the common stocks issued by companies based in mainland China and are traded in renminbi (‘‘RMB'') on the Shenzhen or Shanghai Stock Exchanges. These are currently closed off to many Western investors. Only Qualified Foreign Institutional Investors and Renminbi Qualified Foreign Institutional Investors have access to these shares.

However, MSCI also noted that it will continue monitoring China A-shares market and keep them on hold for consideration in the 2015 Annual Market Classification Review. Initially, China A-Shares market was blocked to many foreign investors, but it is slowly beginning to open up. Foreign investors can access this market through ETF form.

The growing share of the China A‐shares market, the option of additional regulatory reforms leading to grater tradability and some changes expected in the near term including the execution of the Shanghai/Hong Kong Stock Connect program made MSCI open to A-shares. MSCI will launch a China A International Index as a separate standard by

(read:

).

Apart from A-Shares issues, MSCI also ruled out the possibility of South Korea and Taiwan's upgrade to a developed index.  Dearth of remarkable development in those regions resulting in non-‘accessibility' in the respective equity markets was behind this decision.

These two markets have long been under debate on whether they should receive a developed status. Notably, MSCI's peers –

Dow Jones Indices – already accredited South Korea as a developed nation.

On a separate note, MSCI reiterated Egypt's status as an emerging market, escaping a relegation to frontier markets grade given the huge foreign currency pile-up in the concerned nation.

As per

, about $2.3 trillion is linked to the MSCI World Index of developed markets while $1.3 trillion of investment revolves around the emerging-market indicator. The MSCI emerging market index allocates highest share in China (about 18.6%) followed by South Korea (16.1%) and Taiwan (12.1%).

Three top holdings go to Samsung Electronics which is a South Korean company, Taiwan Semiconductor and Chinese Tencent Holdings. So, it was less likely that MSCI would mess with its indexing. An upgrade might compel passive funds to

their stakes in Korean or Taiwanese shares.

The ETF market seems okay with this decision.

– the second largest emerging markets equities ETF – fell 0.34% in the key trading session on June 11.

was down 0.38% on June 11 while

closed June 11 with 0.52% loss but gained 0.18% in after hours.

China A-Share ETFs also shed some gains with

being down 0.67% on June 11 and

(ASHR) retreating 0.49% on the same day.  Among the discussed investing avenues, only Egypt was the true gainer from this classification and generated 1.46% return at the close on June 11.

Want the latest recommendations from Zacks Investment Research? Today, you can download

.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days.