Emerging vs developed markets.

In plain English

Emerging and developed are labels that index providers assign to national stock and bond markets to describe how open and investable they are. The tests cover income per person, market size and trading liquidity, regulatory quality, and how freely foreign investors can move money in and out. Developed markets meet all of the tests. Emerging markets meet some, and frontier markets fewer still. The label is not permanent, because providers upgrade and downgrade countries after consultation, and a reclassification forces every fund tracking those indexes to buy or sell. Emerging markets typically carry higher expected returns, higher volatility, and more country risk.

01Why it matters

The label decides which fund a country's shares appear in, so a reclassification can move billions of dollars in and out of a market for reasons that have nothing to do with any company's business.

02The math, step by step

Say an emerging market fund holds 5 percent in one country and that country is upgraded to developed. The emerging fund must sell while developed funds buy. On a 40 billion dollar fund, 5 percent is 2 billion dollars of forced selling spread across the transition window.

Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.

03What this is NOT

04Receipts

Every figure on this page is sourced to a primary document. Tap to open the original.