Get Ready for MSCI Index Shifts

by: Emerging Money

By Tim Seymour

The global index gurus at MSCI are scheduled to make a big announcement tonight about the new country weightings — and maybe a few added surprises. Expect the press release at 5 p.m. ET.

There should be at least a few tactical shifts where the specific constituents of the EEM index are concerned. Some countries will become bigger players on the index, while others will see their overall weight decline. Either way, EEM and other funds that try to match the benchmark will need to buy and sell in order to stay on course — and that could present trading opportunities over the next few days.

The bigger changes might come if MSCI decides to move one or more countries up the scale of “frontier” to “emerging” to “developed” market. Such a move would force fund managers to buy heavily into the lucky market in order to get their portfolios back on the benchmark, and since institutional action weighs especially heavy, the lower down the scale you go, there could be a lot of buying at stake.

There is speculation in the market that the UAE and Qatar will move up from the frontier markets category into the emerging world, while Taiwan (NYSEARCA:EWT) and South Korea (NYSEARCA:EWY) are reportedly candidates to finally earn “developed” status:

If either South Korea or Taiwan graduate, it would leave a huge hole in the EEM. Korea already accounts for 14.8% of the index and Taiwan adds another 11.7%.

Fund managers will probably need to concentrate on South Africa (NYSEARCA:EZA), Russia (NYSEARCA:RSX), Turkey (NYSEARCA:TUR) and Poland (NYSEARCA:PLND) to fill the gap.

Will it happen? It has been rumored before over the years, but at this point a move this major may be overdue.