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A Big Week For Argentina ETFs

ETF Professor

Later Tuesday, MSCI Inc. (NYSE: MSCI), one of the largest providers of indexes for use with exchange-traded funds, releases its annual market classification. While most eyes will be on MSCI's decision regarding the status of China A-shares, the status of another market is worth watching as well.

Some market observers expect MSCI will put Argentina, South America's second-largest economy, on the list for promotion to emerging markets territory. Those expectations are a big reason why the Global X MSCI Argentina ETF (NYSE: ARGT), the first Argentina ETF to list in the U.S., is up nearly 30 percent year to date.

Frontier Vs. Emerging Market

Argentina is currently classified as a frontier market, though it has been an emerging market in the past. The South American nation is the largest country weight in the iShares MSCI Frontier 100 ETF (NYSE: FM) at 19 percent. In 2009, MSCI demoted Argentina to frontier status.

“According to estimates from the JP Morgan investment bank, an additional US$1.37 billion in investment could be made through the new Emerging Markets index,” reported the Buenos Aires Herald. “But while many experts say there is a high probability that Argentina will re-enter the MSCI index, the decision is far from certain. If Argentina doesn’t get the green light, many experts believe this will lead to an immediate correction in the stock market.”

The MSCI Emerging Markets has $1.6 trillion benchmarked to it, making the emerging markets promotion highly sought after by frontier markets. Pakistan is making that jump this year. In the case of Argentina, the country needs to earn a spot on the list for promotion and would then join the MSCI benchmark in 2018.

What It Takes To Be Upgraded

Among other factors, MSCI considers market accessibility, liquidity, economic development and size when considering countries for market classification promotions.

“In the MSCI Market reclassification proposal for Argentina, released last March, it underlined the need for improvement in several areas, highlighting the efficiency of the Merval stock market’s operational framework, the market’s infrastructure and the 120-day minimum stay period for investments,” according to the Buenos Aires Herald.

ARGT, which debuted in March 2011, has $174.2 million in assets under management. The ETF got a rival in April when the iShares MSCI Argentina and Global Exposure ETF (BATS: AGT) debuted. Both ETFs track the MSCI All Argentina 25/50 Index.

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