Vanguard’s index switch to hit S Korea

It’s all in the detail. US fund manager Vanguard’s decision to switch to tracking FTSE indices for six funds worth over $120bn rather than the MSCI equivalents will have a big knock-on effect on emerging markets.

The decision could see a shift of billions as the definition of what constitutes an emerging market differs between the two groups. South Korea may be one of the biggest losers.

According to a JPMorgan note, “South Korea will be impacted the most: net outflow is estimated at approximately $10bn”, as South Korea is classified as a developed market in the *FTSE world, but an emerging market by the MSCI. South Korea has a weighting of around 15 per cent in the MSCI EM index.

And it’s not just South Korea that will likely lose out. China could see over $350m net outflows as well – because it has a lower allocation in the FTSE EM index than in the MSCI version.

There are winners though as the Korea- and China- bound funds are spread around other countries. Brazil, South Africa and India would see the biggest inflows, for a combined total of around $5bn, while Russia would attract over $400m according to JPMorgan estimates. Taiwan, Malaysia, Indonesia and Thailand may also see slight increases.

Other countries that will see a benefit by having a greater weighting in the EM FTSE universe are the UAE and Egypt.

The biggest loser of all is MSCI, which saw its shares fall 27 per cent on Tuesday, through the loss of business. On Wednesday, they recovered nearly 5 per cent, but that still leaves them around 22 per cent down.

* FTSE indices are not part of the FT Group

Related reading:
Vanguard drops MSCI indices for FTSE
, FT