Regional and emerging market ETFs

What these funds hold 

A regional fund holds the shares of companies listed in one country or one group of countries, selected by an index that defines the region. The catalog carries the standard divisions. The iShares MSCI Japan, iShares MSCI Brazil, iShares China Large-Cap and iShares MSCI India funds each hold one national market. The iShares MSCI Emerging Markets and Vanguard Emerging Markets funds hold a basket spanning many developing markets at once. The iShares MSCI EAFE and Vanguard Developed Markets funds hold developed markets outside the United States. The KraneShares China Internet fund narrows further still, holding one industry within one country.

All of these funds are listed on an American exchange and quoted in dollars, while the companies they hold are listed on their home exchanges and quoted in their home currencies. That single fact generates most of the features that separate these funds from a domestic index fund.

The return has two components 

The value of a foreign holding, measured in dollars, is the local share price multiplied by the exchange rate. Both parts move, and they move for different reasons. A fund whose holdings rose in local terms can still fall in dollars if the local currency weakened by more than the shares gained, and a fund whose holdings were flat can rise in dollars if the currency strengthened. Neither outcome is an error in the fund's tracking; both are the arithmetic of holding one currency's assets and reporting in another.

Most of the well known regional funds are unhedged, meaning they carry the currency component in full. Hedged share classes exist for some markets and state the fact in their name. Whether a fund is hedged is a property of its stated objective and is published in its documentation rather than being inferable from its price.

The fund trades while its market is shut 

A fund holding Japanese, Chinese or Indian shares trades through the American session, by which time the home exchange has been closed for hours. During that period nobody can transact in the underlying shares, and no new prices for them exist. The fund's own price nonetheless keeps moving, because buyers and sellers of the fund are pricing what they expect the home market to do when it reopens, using whatever has happened since it closed: American index moves, currency moves, commodity moves, news about the country.

Two consequences follow, and both are ordinary rather than defective. Net asset value is calculated from stale closing prices in the home market, so a large premium or discount to it during the American session is usually the fund being current rather than the fund being mispriced. And the fund's price commonly gaps at its own open, because the home market has traded overnight and the fund's first American print steps to reflect it. Creation and redemption is also harder across time zones, since the basket cannot be assembled while the home exchange is closed, which is one reason these funds sustain wider premiums and discounts than domestic ones.

Who decides what counts as an emerging market 

Developed, emerging and frontier are index classifications rather than economic descriptions, and the major index providers each maintain their own criteria covering market size, liquidity, settlement infrastructure and the ease with which foreign investors can move money in and out. The classifications do not always agree, so one country can sit in different categories in two providers' indices at the same time, and a fund follows whichever provider its own index comes from.

Reclassification is consequential because it is mechanical. When a provider promotes or demotes a market, every fund licensed to the affected indices must buy or sell that market's shares to match the new file on the effective date, and those flows are large relative to the local market. The reviews are announced in advance and phased over several dates for that reason. The same mechanism operates for inclusion decisions on individual share classes, which is how a national market's weight in a global index changes without any company in it doing anything.

Access constraints shape the portfolio 

A fund can only hold what a foreign investor is permitted to buy. Several markets maintain separate share classes for domestic and foreign holders, quotas on foreign ownership, or approval regimes for institutional access. Chinese equities are the clearest example, with companies listed variously on mainland exchanges, in Hong Kong and in the United States, and index providers deciding which of those lines are eligible and in what proportion. Two funds nominally covering the same country can therefore hold quite different sets of securities.

Capital controls, local holidays, settlement conventions and withholding tax all reach the fund as well. A home market holiday means the fund trades on a day when its holdings cannot be valued or traded at all. Withholding tax on dividends reduces the income the fund receives relative to a domestic holder. None of this appears on a price chart, and all of it appears in the fund's documentation.

What moves them 

Beyond the drivers of the shares themselves, three forces recur across this group. The dollar matters twice over, once through the exchange rate in the return and once because dollar funding conditions affect capital flows into developing markets. Commodity prices matter for markets whose listed companies and public finances depend on exports of one material. And global risk appetite matters, because allocations to this group are frequently made and withdrawn at the regional level rather than name by name, which is why country funds can move together on days when their domestic news is unrelated.