The term emerging market has a nice feel to it. You think you're capturing the "rest of the world", which is (1) supposed to grow fast as it converges to the productivity frontier and (2) be good for diversification since there are so many emerging markets out there. In reality, 70-75% of the holdings (e.g. Vanguard's VWO or BlackRock's EEM) come down to just 3-4 countries: China, India, Taiwan, and (sometimes) Korea.
Korea and Taiwan are basically developed countries and would be removed from the category if not for inertia (Vanguard already excludes Korea, while MSCI/BlackRock do not). China is weird; the economy grows, but the stock market is astonishingly stagnant. Some set of domestic idiosyncrasies or Party shenanigans seem to prevent rising valuations. The other 25-30% mostly lack diversified economies and swing with whatever commodities they specialize in.
That leaves India and a few small constituents like Mexico and Malaysia as representing emerging markets the way we abstractly think about them. You can either buy into financial theory (APT and cousins) and simply hold the total world market in proportion to market caps (presumably we'll start being rewarded for holding emerging market risks any day now). Or one can take views and specifically hold ETFs for India, Mexico, etc.
What wouldn't make sense is having some non-market cap weight to "emerging markets". The category is too heterogenous to be meaningful. Vanguard seems to be faithful to market cap weights, so their position is defensible even if it has underperformed for many years now.
The term emerging market has a nice feel to it. You think you're capturing the "rest of the world", which is (1) supposed to grow fast as it converges to the productivity frontier and (2) be good for diversification since there are so many emerging markets out there. In reality, 70-75% of the holdings (e.g. Vanguard's VWO or BlackRock's EEM) come down to just 3-4 countries: China, India, Taiwan, and (sometimes) Korea.
Korea and Taiwan are basically developed countries and would be removed from the category if not for inertia (Vanguard already excludes Korea, while MSCI/BlackRock do not). China is weird; the economy grows, but the stock market is astonishingly stagnant. Some set of domestic idiosyncrasies or Party shenanigans seem to prevent rising valuations. The other 25-30% mostly lack diversified economies and swing with whatever commodities they specialize in.
That leaves India and a few small constituents like Mexico and Malaysia as representing emerging markets the way we abstractly think about them. You can either buy into financial theory (APT and cousins) and simply hold the total world market in proportion to market caps (presumably we'll start being rewarded for holding emerging market risks any day now). Or one can take views and specifically hold ETFs for India, Mexico, etc.
What wouldn't make sense is having some non-market cap weight to "emerging markets". The category is too heterogenous to be meaningful. Vanguard seems to be faithful to market cap weights, so their position is defensible even if it has underperformed for many years now.
Thanks! Very thoughtful observations here. Much appreciated.