Emerging Markets ETF

Hi all!

Suppose I invest in an emerging markets ETF because I like the prospects of China, Taiwan, South Korea, and India (and some smaller weightings to other emerging markets); and suppose I invest £5k a year into an emerging markets ETF for 10 years.

In total I have invested £50k into this ETF. Now, since I am investing into emerging markets, I would like the economy of China, Taiwan, South Korea, and India to do very well (and the others).

Suppose China’s economy does extremely well in the next 10 years. Great! But what happens if China does so well that it is not classed as an emerging market anymore? Will China be removed from my ETF? Will there be a big drop the day China is removed? Will we get notice if a big change to the ETF is going to occur?

I understand that ETFs reweight regularly. However, the decision to remove China in this scenario would not be a rebalancing decision. China would be removed because it is no longer an emerging market.

It sounds like I want China’s economy (and other countries’ economies within the ETF) to grow, but if they grow too much, I will not receive the benefits as they will be removed from my portfolio?

Can anyone help with my questions?

Has anyone ever seen a period where a country has been removed from their emerging markets ETF because of the above reason? I.e., because the country transitioned to a developed market from an emerging market.

If it’s not classed as an EM by the index provider then it will be removed.
If it were to be removed then the ETF provider would sell all its China holdings and purchase more of the remaining index. There shouldn’t be an impact on the share price.
There won’t be notice of this change through your broker but it’s such a big change that it’s likely to be make it onto financial news outlets.

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Take a look at The Emerging Markets Internet and Ecommerce UCITS ETF - EMQQ. Outperfomed MSCI EM by 65% in 2020

By the way don’t always assume emerging market economies doing well means their stock markets will necessarily go up.

The correlation is not as clear as you may think.


Yes - opposite scenario to OP’s just happened with Argentina. Removed from Msci emerging markets and given standalone status due to its crazy fiscal policies. Instead of parity with Mexico, Brazil etc, it’s now put alongside the Gaza Strip.

Yep and sometimes EM economies have an amazing single year followed by a couple of really bad years whereas the US market has more consistent returns so part of the risk is you never know if you’ll get a lot of upside or a lot of downside.