Later Tuesday, MSCI Inc. (NYSE: MSCI), one of the
largest providers of indexes for use with exchange-traded funds, releases its annual market classification. While most eyes will be
on MSCI's decision regarding the status of China A-shares, the status of another market is worth watching as well.
Some market observers expect MSCI will put Argentina, South America's second-largest economy, on the list for promotion to
emerging markets territory. Those expectations are a big reason why the Global X MSCI Argentina ETF (NYSE: ARGT), the first Argentina ETF to list in the U.S., is up nearly 30 percent year
to date.
Frontier Vs. Emerging Market
Argentina is currently classified as a frontier market, though it has been an emerging market in the past. The South American
nation is the largest country weight in the iShares MSCI Frontier 100 ETF (NYSE: FM) at 19 percent. In 2009, MSCI demoted Argentina to frontier status.
“According to estimates from the JP Morgan investment bank, an additional US$1.37 billion in investment could be made through
the new Emerging Markets index,” reported the Buenos
Aires Herald. “But while many experts say there is a high probability that Argentina will re-enter the MSCI index, the decision
is far from certain. If Argentina doesn’t get the green light, many experts believe this will lead to an immediate correction in
the stock market.”
The MSCI Emerging Markets has $1.6 trillion benchmarked to it, making the emerging markets promotion highly sought after by
frontier markets. Pakistan is making
that jump this year. In the case of Argentina, the country needs to earn a spot on the list for promotion and would then join
the MSCI benchmark in 2018.
What It Takes To Be Upgraded
Among other factors, MSCI considers market accessibility, liquidity, economic development and size when considering countries
for market classification promotions.
“In the MSCI Market reclassification proposal for Argentina, released last March, it underlined the need for improvement in
several areas, highlighting the efficiency of the Merval stock market’s operational framework, the market’s infrastructure and the
120-day minimum stay period for investments,” according to the Buenos Aires Herald.
ARGT, which debuted in March 2011, has $174.2 million in assets under management. The ETF got a rival in April when the
iShares MSCI Argentina and Global Exposure ETF (BATS: AGT) debuted. Both ETFs track the MSCI All Argentina 25/50 Index.
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