Emerging Market allocation shift when going from FTSE to MSCI

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ma21n2
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Joined: Fri Sep 28, 2018 9:25 pm

Emerging Market allocation shift when going from FTSE to MSCI

Post by ma21n2 »

Hi, I allocate 25% of my international stock allocation to emerging markets. When I chose that allocation, I was using Vanguard's definition of "Emerging Markets", i.e., FTSE index, which does not include South Korea. I've been mainly purchasing VTMGX (Vanguard Developed International) and VEMAX (Vanguard Emerging Market).

I recently tax loss harvested, going from VEMAX to IEMG (iShares MSCI Emerging Markets). I knew IEMG tracked a different EM index (MSCI) that included South Korea, but always thought SK was just a very small portion of IEMG. It turns out 13.69% of IEMG is South Korea, which is a lot more than I expected. So for every $1 of VEMAX I sold, I was only buying ~$0.84 worth of "Emerging Markets" (FTSE definition). If I keep buying more IEMG for my EM allocation, I'd really be underweighting EM (FTSE definition) below the 25% EM target I set.

How do you address this, if at all?
TdF fan
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Re: Emerging Market allocation shift when going from FTSE to MSCI

Post by TdF fan »

You could use SCHE etf which is Schwab's EM etf. It uses a FTSE index that does not include Korea.
https://www.schwabassetmanagement.com/products/sche

It's a slightly different index than Vanguard uses. It has large- and mid-caps but no small caps. I'm assuming SCHE would be suitably different enough for TLH with VEMAX/VWO.
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nisiprius
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Re: Emerging Market allocation shift when going from FTSE to MSCI

Post by nisiprius »

Let's say 40% of your stock allocation is international. Then, you are talking about
13.69%...
of 25%...
of 40%...
= 1.37% of your portfolio.

Now consider that the iShares MSCI South Korea ETF, EWY, has had an 88% correlation with the Vanguard Emerging Markets Index Fund, VEMAX.

In other words, South Korea isn't all that different from the rest of the emerging markets, and when you are holding IEMG only 1.37% of your portfolio is South Korean.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
Topic Author
ma21n2
Posts: 211
Joined: Fri Sep 28, 2018 9:25 pm

Re: Emerging Market allocation shift when going from FTSE to MSCI

Post by ma21n2 »

That’s a good point, thank you. I didn’t think to check correlation. I won’t worry about this then.
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