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MSCI Could Reclassify Market Status of South Korea, Taiwan (EWT, EWY, VWO)

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MSCI Could Reclassify Market Status of South Korea, Taiwan (EWT, EWY, VWO)

MSCI (NYSE: MSCI), the firm whose indexes are tracked by dozens of developed and emerging markets ETFs, will announce the results of its 2012 annual market classification review at 5 p.m. Eastern time on Wednesday June 20.

The results could impact several prominent ETFs, including the Vanguard MSCI Emerging Markets ETF (NYSE: VWO) and the iShares MSCI Emerging Markets Index Fund (NYSE: EEM) because South Korea and Taiwan are once again candidates to be promoted to developed markets status.

If South Korea and Taiwan do graduate to developed markets status, funds such as VWO and EEM, the two largest emerging markets ETFs, would be forced to sell stocks from those countries, a move that could create taxable distributions for shareholders in the funds. South Korea and Taiwan combine for about 26 percent of EEM's weight

South Korea and Taiwan have traveled this road before as both failed to win the emerging-to-developed markets promotion from MSCI in June 2011. It is worth noting that MSCI has stood out in keeping South Korea as a developing nation when other index providers bumped the country to developed status long ago. For example, FTSE gave South Korea the developed market label in 2008.

For its part, Taiwan on has been review for the developed markets promotion for several years as well. A possible move to developed markets status could have consequences for funds such as the iShares MSCI South Korea Index Fund (NYSE: EWY) and the iShares MSCI Taiwan Index Fund (NYSE: EWT) because the two countries would account for small percentages of MSCI all-world and developed market indexes.

There is an example that supports the claim that EWY and EWT could be adversely impacted by the developed markets promotion. Roughly three years ago, Israel made the jump to developed markets status. Since June 19, 2009, the iShares MSCI Israel Capped Investable Market Index Fund (NYSE: EIS) has lost 10.1 percent.

In terms of countries that could benefit from possible reclassifcation moves by MSCI, there are two obvious choices: Qatar and United Arab Emirates. The two Arab states have failed three times to make the leap to emerging status from the higher risk frontier markets label. The last failure came in December 2011. In June 2011, MSCI deferred its decision for a further six months to allow investors to get used to a new settlement system known as delivery versus payment, according to MENAFN.com.

By shedding the frontier markets label, it is possible that Qatar and UAE would be viewed as less risky by international investors. The WisdomTree Middle East Dividend Fund (Nasdaq: GULF) could benefit from Qatar and UAE gaining the emerging markets classification as those two countries combine for almost 57% of the fund's weight. The two countries also combine for 53% of the Market Vectors Gulf States ETF's (NYSE: MES) weight.

Assuming Qatar and UAE earn the promotion, the PowerShares MENA Frontier Countries Portfolio (Nasdaq: PMNA) would be a possible candidate for rebalancing because that fund is exclusively devoted to frontier markets. Qatar and UAE combine for over 39% of PMNA's weight.

Posted-In: Long Ideas News Short Ideas Specialty ETFs Emerging Market ETFs Events Global Intraday Update Markets Trading Ideas ETFs

 

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