Country Classifications: Developed versus Emerging Markets
Financial markets around the world are categorized into one of three categories:
- Developed markets
- Emerging markets
- Frontier markets
The categorization process is performed by four of the largest index providers: S&P, MSCI, FTSE and NASDAQ. Each index provider has a different set of rules to perform the categorization process. As a general rule, one of the biggest factors is the gross domestic product per capita of each country. But the index providers will also look at health measures like the average life expectancy, plus financial market metrics like the average volume of trades. The four index providers generally re-evaluate each country on an annual basis. So every couple of years, a country will get promoted or demoted from one category to another.
For the most part, the four index providers end up ranking each country in the same category, but from time to time, there are differences. For example, when South Korea was promoted to a developed country, it took a few years for all the index providers to make that change.
This system was largely devised as way for investors to build investment portfolios. The belief is that as a group, the stock markets in the developed markets and emerging markets will tend to move closely together. And as a group, these stock markets at times perform quite a bit differently than the U.S. stock market.
Frontier markets are those markets in still developing countries that lack sufficient infrastructure and other requirements to be considered an emerging market. Most U.S. investors are afraid to devote too much of their portfolio to a stock market in a frontier market. So it can be a big deal for a country to get promoted from a frontier market to an emerging market.
When most investors think about "developed market" stocks, they tend to think of developed markets other than the U.S. The most common index that follows developed markets is the MSCI EAFE Index, which actually tracks all developed markets excluding the US and Canada. EFA is an iShares ETF that tracks the MSCI EAFE Index and has been around forever.
In broad strokes, if you look at the total market capitalization of the world's stock markets, the U.S. makes up around 50-52%, the developed markets ex-US about 30-35%, and emerging market and frontier market stocks about 15%.
Developed markets
These are the financial markets in the United States, Canada, Japan and most of the countries in Western Europe:
| Country | Largest ETF |
|---|---|
| Australia | EWA |
| Austria | EWO |
| Belgium | EWK |
| Canada | EWC |
| Denmark | EDEN |
| Finland | EFNL |
| France | EWQ |
| Germany | EWG |
| Greece | GREK |
| Hong Kong | EWH |
| Iceland | |
| Ireland | EIRL |
| Israel | EIS |
| Italy | EWI |
| Japan | EWJ |
| Luxembourg | |
| Monaco | |
| New Zealand | ENZL |
| Norway | NORW |
| Portugal | PGAL |
| Singapore | EWS |
| South Korea | EWY |
| Spain | EWP |
| Sweden | EWD |
| Switzerland | EWL |
| The Netherlands | EWN |
| United Kingdom | EWU |
| USA | SPY |
Emerging markets
Emerging markets include the so-called "BRICS" countries – Brazil, Russia, India, China, South Africa, Iran, Egypt, Ethiopia, and the United Arab Emirates plus about 15 other countries.
| Country | Largest ETF |
|---|---|
| Brazil | EWZ |
| Cayman Islands | |
| Chile | ECH |
| China | FXI |
| Colombia | GXG |
| Croatia | |
| Czech Republic | |
| Egypt | EGPT |
| Ethiopia | |
| Hungary | |
| India | INDA |
| Indonesia | EIDO |
| Malaysia | EWM |
| Mexico | EWW |
| Peru | EPU |
| Philippines | EPHE |
| Poland | EPOL |
| Qatar | QAT |
| Saudi Arabia | KSA |
| Slovenia | |
| South Africa | EZA |
| Taiwan | EWT |
| Thailand | THD |
| Turkey | TUR |
| Ukraine | |
| United Arab Emirates | UAE |
These countries make up approximately 98.4% of the total emerging market stock market capitalization. There are a few other small countries that we have not included in this list.
There are two giant ETFs that have been around along time that are synonymous with "emerging market" ETFs: VWO and EEM.
So you can see the approximate weighting of each country, let's look at VWO. VWO follows the FTSE Emerging Markets All Cap China A Inclusion Index. The FTSE Emerging Markets All Cap China A Inclusion Index weights the countries as follows (rounded numbers):
- China 29.5%
- India 23.20%
- Taiwan 20.40%
- Brazil 4.60%
- Saudi Arabia 4.20%
- South Africa 3.40%
- Thailand 2.20%
- Malaysia 2%
- Mexico 2%
- Indonesia 1.90%
- United Arab Emirates 1.60%
- Turkey 1%
- Others 4%
As you can see from the above numbers, the BRICS make up about 60% of most emerging market indexes.
Frontier markets
These are still developing countries:
| Country | Largest ETF |
|---|---|
| Argentina | ARGT |
| Bahrain | |
| Bangladesh | |
| Cyprus | |
| Jamaica | |
| Jordan | |
| Kazakhstan | |
| Kenya | |
| Kuwait | KWT |
| Mauritius | |
| Morocco | |
| Nigeria | NGE |
| Oman | |
| Pakistan | PAK |
| Romania | |
| Senegal | |
| Sri Lanka | |
| Uruguay | |
| Vietnam | VNM |