Emerging Market ETFs: The Shifting Landscape

Includes: AGEM, EEM, EWT, EWY
by: Carl T. Delfeld

On or around June 21, MSCI will publicly announce any countries that are slated to "graduate" from the MSCI emerging market index.

Last round, Israel got the nod and on that day the country's ETF, EIS, dropped 4%.

Institutional investors by a significant margin see a graduation from the list as a negative for the countries involved, and this will be especially so with the emerging markets ETF (NYSEARCA:EEM) which is in the top five in terms of assets under management. I think it ranks 4th after SPY, GLD and EFA.

My best guess is that South Korea (NYSEARCA:EWY) and/or Taiwan (NYSEARCA:EWT) could get the nod. It is also quite possible that no changes will be made. This is significant because these two countries together make up 25% of the MSCI EM index (EEM).

My trading idea is to sell or (for more aggressive investors) buy a put option on EEM or specifically
on EWT or EWY.

This could be paired with a call or a long position in Globalshares Global Titans (EEG) which is a basket of 50 emerging market companies but, unlike EEM, does not have any exposure to South Korea or Taiwan.

It is hard to believe that South Korea with a GDP equal to that of India with only 25 million people should be still classified as emerging.

Risk: High, suggest 8% trailing stop loss.