Greece Suffers Another Market Classification Demotion

Greece, a country that seemingly holds elections as frequently as some people change socks, is doing just that next week, that is holding more national elections, but in advance of those elections the Global X FTSE Greece 20 ETF GREK has other issues with which to contend.

Last week, FTSE Russell demoted Greece's market classification to “advanced emerging” from developed market status. The demotion is potentially noteworthy, because as its name implies, GREK follows a FTSE Russell index; the FTSE/ATHEX 20 Capped Index.

FTSE Russell's decision to demote Greece to advanced emerging status is not surprising when considering Russell Indexes was the first major index provider to demote Greece to emerging markets territory from developed markets in 2013. Russell has since been acquired by FTSE Group. MSCI and S&P Dow Jones Indices would later follow Russell in demoting Greece to emerging markets status. 

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“Greece will be demoted from Developed to Advanced Emerging due to the recent extended market closure, imposition of capital controls on domestic investors and continued economic instability; these are not characteristics associated with a stable Developed market,” said FTSE in a statement.

Others Feeling The Burn

The move affects more than just GREK. The Vanguard FTSE Emerging Markets ETF VWO tracks a FTSE index, meaning that the largest emerging markets ETF by assets could add Greek stocks. If that happens, it is likely Greek stocks will not enjoy much of a presence in VWO as evidenced by the country's scant weighting in the MSCI Emerging Markets Index.

Adding to the lack of surprise surrounding FTSE Russell's decision to demote Greece is a warning from rival MSCI, issued in June, that that index provider could demote Greek stocks to standalone status. Said another way, if Greece does not get its financial house in order, MSCI could strip Greece of its emerging markets status, skip making it a frontier country, throwing Greek stocks into standalone purgatory.

FTSE's most recent market classification could affect other ETFs, including the iShares MSCI Qatar Capped ETF QAT. FTSE upgraded Qatar to secondary emerging status from the frontier markets designation, though Qatar has long since received an emerging markets promotion from MSCI.

ETFs tracking Chinese A-shares, including the Deutsche X-trackers Harvest CSI 300 China A-Shares ETF ASHR, could also be worth watching following the FTSE announcement because the index provider said A-shares remain on its watch list for a possible upgrade to secondary emerging status.

In May, FTSE Russell said it would allow A-shares into the FTSE Emerging Markets Index and other global benchmarks, meaning VWO will add A-shares later this year.

“The demotion of Greece from Developed to Advanced Emerging status will be implemented in conjunction with the semi-annual review of the FTSE Global Equity Index Series (GEIS) in March 2016,” said FTSE.