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Know Market Labels Before Buying International ETFs

|Includes: EIS, EWT, iShares MSCI South Korea Capped ETF (EWY)
Labels mean something. They're why a blue Armani suit costs more than basically the same suit at a department store. They're why Titleist golf balls cost more than Maxflis. Believe it or not, labels mean something in the ETF world and when I say "label," I really mean market designation, either developed, emerging or frontier.

You've probably noticed that many iShares international ETFs track an index that was created by a company called MSCI. MSCI also provides financial data, but indexes are what most investors know the company for. In other words, MSCI plays a role in whether a country is viewed as a developed, emerging or frontier market.

I bring this up because on Tuesday Credit Suisse speculated that MSCI isn't likely to make any substantial changes to its indexes this year and may not do so until 2013. That's good news if you happen to be long the iShares MSCI South Korea Index Fund (NYSE: EWY) and the iShares MSCI Taiwan Index Fund (NYSE: EWT).

I say good news because South Korea and Taiwan will be retaining their emerging markets status for the foreseeable future and we all know emerging markets are a lot sexier than developed markets. On the other hand, it appears Qatar and the United Arab Emirates may have to wait a little while longer before graduating from frontier to emerging.

This is a different issue. Frontier markets (think places like most of Africa, the Middle East, Vietnam, etc.) are viewed as far more risky than emerging markets, so some investors say to themselves "Why deal with frontier markets headaches when I can just put cash into an emerging market?" To some extent, this keeps frontier market ETFs from truly flourishing, though that could change this year.

I'll get deeper into frontier markets later this year, but I do want to focus on the emerging/developed differentiation and why its important to ETF investors. Generally speaking, it's good for a country to evolve from frontier to emerging to developed because with each step higher, more economic doors open, the country becomes more marketable to global investors and can tap the capital markets with greater ease.

On the other hand, the move from emerging to developed isn't always a win for ETF investors. Here's a great example: Israel lost its emerging markets status in June 2009. The news wasn't surprising as Israel was one of the largest economies with the emerging markets tag at the time, but last year when emerging markets ETFs were on fire, the iShares MSCI Israel Capped Investable Market Index Fund (NYSE: EIS) was a laggard.

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Proving there is little science involved in what countries get what designation, Israel had almost $135 billion in stock market value at the time of its upgrade, according to Bloomberg News. South Korea has $500 billion in free-floating market value, Barron's reported, citing Credit Suisse.

As an ETF investor, you don't need to know how MSCI and other indexers come up with country designations, you merely need to know what designation the country has. This will prevent disappointments and keep your investment objectives clear and perhaps more profitable.

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