No Developed Markets Upgrade for South Korea, Taiwan

ETF Trends

For the seventh consecutive year, index provider MSCI (MSCI) has denied South Korea a promotion to developed markets status. Taiwan was denied for a sixth straight year.

The two countries, the second- and third-largest country weights in the MSCI Emerging Markets Index behind China, will no longer be considered for promotion to developed market status. South Korea, Asia’s fourth-largest economy, and Taiwan combine for over 27% of the iShares MSCI Emerging Markets ETF’s (EEM) weight.

Global investors have argued that South Korea should be a developed market, pointing out the country has a higher GDP than Portugal, a developed market, but MSCI has frequently cited the lack of offshore convertibility of the won as one reason for keeping South Korea as an emerging market. [Don't Bet on South Korea Becoming a Developed Market]

Retention of its emerging markets status with MSCI could prove to be good news for South Korean stocks and ETFs such as the iShares MSCI South Korea Capped ETF (EWY) and the Horizons Korea KOSPI 200 ETF (HKOR) because the selling by fund managers that benchmark to the MSCI Emerging Markets Index would have likely outweighed the buying related to the country’s possible addition to developed market indices.

HKOR is the only U.S.-listed South Korea ETF that acts as a proxy for the Kospi 200, South Korea’s equivalent of the S&P 500. The Kospi 200, HKOR’s underlying index, is the most widely used Korean stock benchmark used in Korea, as well as the rest of Asia. [South Korea ETFs Could Shoot Higher]

The decision to cease considering South Korea and Taiwan for an upgrade “is motivated by the absence of any significant improvements in key areas negatively affecting accessibility in the Korean and Taiwanese equity markets for the past few years. Both indexes may be added back to the review list as soon as there will be meaningful improvements,” said MSCI in a statement.

MSCI rival FTSE Group elevated South Korea to developed market status in 2009, meaning the Vanguard FTSE Emerging Markets ETF (VWO) , the largest emerging markets ETF by assets, does not include South Korean equities in its lineup.

The SPDR S&P Emerging Markets ETF (GMM) also excludes South Korea. Some emerging markets ETFS exclude both South Korea and Taiwan. Those ETFs include the EGShares Emerging Markets Consumer ETF (ECON) , which has over $1 billion in assets under management, and the EGShares Emerging Markets Core ETF (EMCR) .

iShares MSCI Emerging Markets ETF  

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Tom Lydon’s clients own shares of EEM.

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