At what point is an emerging market no longer “emerging”? It’s a question investors have been asking for some time especially given indexing behemoth MSCI’s tendancy to classify some countries as emerging when they’ve clearly crossed the border into developed territory. Indeed, investors insist that two of Asia’s largest economies – Taiwan and South Korea – have clearly outgrown the old emerging classification even though they’re still included as part of the MSCI Emerging Markets Index.
And it’s not just an issue of classification — it’s about the holdings because countries like Taiwan are home to huge multinationals that essentially tilt the index away from those fundamental emerging markets characteristics investors want from their emerging markets exposure.
Which is why one ETF firm has filed regulatory paperwork to launch three separate emerging markets funds titled towards small and midsized companies. ETF provider Emerging Global will introduce a broad equity fund, an equity fund designed to deliver high dividends and an ETF that is a blend of fund-of-funds equities and fixed income able to investor at least a quarter of its assets in other ETFs.
By steering clear of big multinationals based in countries like Taiwan or South Korean (countries which, the firm argues, have already emerged) Emerging Global says that it can deliver performance that really is tied to emerging economies. The firm has defined its small- and midcap parameters as companies with market capitalizations of at least $1 billion.
The move highlights the ongoing shift in global markets, as emerging markets take centre stage in the world economy and as companies evolve into global brands – i.e., South Korea’s Samsung. As index providers like MSCI grapple with how best to index the emerging world, ETF investors can at least find ways to get what they want out of emerging markets be zoning in on market cap.