Market Overview

A New Addition For A Big EM ETF

A New Addition For A Big EM ETF

Home to a staggering $62 billion in assets under management at the end of August, the Vanguard FTSE Emerging Markets ETF (NYSEARCA: VWO) is the largest emerging markets exchange traded fund by a significant margin.


VWO is big in another way. The ETF gives investors exposure to 4,655 stocks, or more than five times the number found in the MSCI Emerging Markets Index. VWO's roster could grow if index provider FTSE Russell makes room for another country, which could happen when the firm reveals its market classification Friday afternoon.


Kuwait, currently classified as a frontier market by MSCI and not classified by FTSE Russell, believes it is in position to join the FTSE Emerging Markets Index, which VWO tracks.


Kuwait's Classification


“Kuwait is in line to join Gulf neighbors including Saudi Arabia and the United Arab Emirates in an inclusion that could boost inflows into its equity market by millions of dollars,” reports Bloomberg. “FTSE Russell is expected to announce its country classification annual review on Friday after markets close in the U.S. The addition would take Kuwaiti stocks from an unclassified status to one of a secondary emerging market.” 


VWO currently features exposure to over 20 emerging markets, including a combined 1.7 percent weight to the United Arab Emirates and Qatar. The ETF is dominated by Asian economies, as highlighted by a combined weight of over 56 percent to China, Taiwan and India.


Close to 40 ETFs currently offer exposure to Kuwaiti stocks, with the largest weights to the oil-rich country being found in the WisdomTree Middle East Dividend Fund (NASDAQ: GULF) at 27.8 percent and the iShares MSCI Frontier 100 ETF (NYSEARCA: FM) at 19.8 percent.


Flows And Speculation


Buoyed by speculation Kuwait will land the FTSE upgrade, the country's stocks are among the Middle East's best performers this year. The country's potential inclusion in the FTSE emerging markets benchmark is impactful in other ways.


“The inclusion could attract about $822 million in flows from passive funds tracking the index, according to calculations by the research arm of investment bank EFG-Hermes Holding. The country’s equities may represent around 0.5 percent of the index, according to strategist Mohamad Al Hajj,” Bloomberg reported. 


If FTSE upgrades Kuwait, investors could speculate that MSCI will follow suit, though a promotion to the MSCI Emerging Markets Index could be two years or more away.


Todd Shriber owns shares of VWO.


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