How One EM ETF Performs Without South Korea

It is fair to say that by now most ETF investors know that the Vanguard MSCI Emerging Markets ETF

, the largest emerging markets ETF by assets, will drop the MSCI index it currently uses in favor of an equivalent index from FTSE Group. The change, scheduled to take place next year, is noteworthy for several reasons. Already the dominant brand among low-cost ETFs and mutual funds, Vanguard believes the index switch will lower investors' costs further. VWO currently charges a scant 0.2% per year, making it less expensive than 87 percent of comparable funds,

. Another important aspect of this looming index swap is South Korea. As in the MSCI Emerging Markets Index classifies South Korea as a developing nation. The FTSE Emerging Markets Index does not, meaning

such as Samsung and Kia. At the end of October, South Korea accounted for 15.3 percent of VWO's country weight. How the ensuing loss of South Korean stocks along with increased exposure to Brazilian and Chinese stocks impacts VWO remains to be seen. However, there is at least one multi-country emerging markets ETF with an established track record that does not feature exposure to South Korea: The SPDR S&P Emerging Markets ETF

. Arguably obscure relative to ETFs such as VWO and the iShares MSCI Emerging Markets ETF, the SPDR S&P Emerging Markets ETF has been around for nearly six years and has almost $167 million in assets under management. GMM tracks the S&P Emerging BMI Index (STBMEMU), which like the aforementioned FTSE index, does not classify South Korea as a developing nation. Year-to-date and over the past 12 months, GMM has almost performed inline with VWO, indicating that over shorter time horizons, there is not a major performance gap simply because South Korea is present in one ETF and not the other. However, since GMM debuted in March 2007, the fund has returned just 12.8 percent. That compares to a 117.3 percent gain for VWO. To be sure, that entire performance gap cannot be attributed to GMM's lack of South Korea exposure. For starters, S&P promoted South Korea to developed market states after GMM debuted. Additionally, the iShares MSCI South Korea Index Fund

is up about 19 percent since GMM came to market. A decent performance for South Korean equities for certain, but not enough for GMM to have noticeably closed the gap on VWO assuming the former had held South Korean stocks for all of its existence. Investors should also note the S&P Emerging BMI Index and the FTSE Emerging Markets Index are not identical twins. Second cousins would be the more appropriate family analogy for the two indexes. For some of the pair's bit components, there are rough similarities when it comes to weightings. For example, the FTSE index devotes about 1.1 percent of its weight to the Philippines

. GMM's allocations to those two

. The two indexes also share comparable exposure to Chile, Turkey and Thailand, among others. Another interesting aspect to the comparison is that GMM's current combined exposure to China and Brazil is about 33.8 percent. The FTSE Emerging Markets Index devotes about 33.2 percent to that pair, but with a lower weight to China and a larger allocation to Brazil than is found in GMM. Arguably, VWO's looming increased weight to Brazil, not its loss of South Korean stocks, could be the bigger source of concern. As EWY's five-year returns highlight, South Korea is not the primary reason VWO surged. Nor is it the reason GMM lagged. However, Brazil is by far the weakest link

. VWO's index switch means increased Brazilian exposure to the tune of about 275 basis points to almost 15.3 percent from 12.5 percent with the MSCI index. The good news for VWO shareholders is that Chinese stocks are bouncing back and the ETF will see its exposure to the world's second-largest economy ratcheted up when the index change is complete. The bottom line here is that GMM, while not a carbon copy of VWO by any means, does give investors some basis for how a multi-country ETF that has no South Korea exposure performs. Still, those considering a new position in VWO and those mulling a possible sale of an existing stake should study the

, which has been pretty solid over the past 12 and 36 months. For more on VWO's index change, click

.