Popular emerging market ETFs are over 50% concentrated in Asian equities
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The chart above shows the concentration for the top 5 countries in the index. China, South Korea and Taiwan account for 44% of the index. Approximately 10% more is accounted by the remaining Asian countries: Malaysia, Indonesia, Thailand and Philippines. Latin America accounts for c. 20% (driven by Brazil) and Africa for less than 10%. The two main ETFs tracking this index, Vanguard’s Emerging Markets ETF (VMO) and iShares Emerging Markets ETF (EEM) suffer from the same bias.
MSCI states that it frequently revises the composition of the index based “extensive discussions with the investment community”, though South Korea is still part of the index despite it is considered an “advanced economy” by the IMF and CIA, a “high income economy” by the World Bank, and a “developed market” by Dow Jones, FTSE and S&P. Additionally, Taiwan is considered an advanced economy by the IMF. Coincidentally, South Korea and Taiwan make up over 26% of the index.
The graph below shows the share by country grouped by regions for VMO, which closely tracks the MSCI EM Index:
An investor interested in tracking emerging markets should be aware of this concentration and consider minimizing exposure to other Asian securities to reduce the portfolio’s geographical concentration risk. Furthermore, it may be prudent to hold Africa oriented ETFs (e.g., EZA, AFK) or Latin America oriented ETFs (e.g., ILF, GML, LBJ) to truly diversify geographically.
- MSCI Inc., formerly Morgan Stanley Capital International, provides services to investment institutions, including indices, portfolio risk and performance analytics, and governance tools. The MSCI Global Equity Indices are widely tracked global equity benchmarks and serve as the basis for over 500 ETFs throughout the world ↩