Developed, emerging and frontier: how MSCI and FTSE classify markets and what a reclassification does

What you will learn

• The three tests MSCI applies before it calls a market developed, emerging or frontier, and how FTSE's four tiers differ.
• Why the same country can sit in different buckets at different providers, using Korea and Greece as examples.
• How to estimate the passive buying or selling that a reclassification triggers.
• What a reclassification means for the ETFs you may already own.

Explanation

An emerging market (EM) is not a country with a certain income level. It is a label given by an index provider (a company that builds and maintains indices) based on written rules. The two providers whose labels move the most money are MSCI and FTSE Russell. How indices weight companies was covered in "ETFs, Funds & Long-Term Investing"; here we look only at how a country gets into an index family at all.

The MSCI framework: three tests

MSCI reviews every market each June. Its framework (2026 edition) has three parts:

1. Economic development. Only for developed status: gross national income (GNI) per person at least 25 % above the World Bank high-income threshold for three consecutive years. Emerging and frontier markets have no income test.
2. Size and liquidity. A minimum number of companies must pass the size and liquidity tests of the standard index: 5 for developed, 3 for emerging, 1 for frontier. Size thresholds are in US dollars and updated quarterly. Liquidity is measured by the annualised traded value ratio (ATVR), roughly yearly traded value divided by free-float market capitalisation: 20 % developed, 15 % emerging, 2.5 % frontier.
3. Market accessibility. Five qualitative criteria: openness to foreign ownership, ease of capital flows, efficiency of the operational framework (settlement, custody, short selling, stock lending), availability of investment instruments (for example offshore futures and ETFs) and stability of the institutional framework. A developed market must score "very high" on almost all of them.

Accessibility usually decides the difficult cases.

The FTSE framework: four tiers

FTSE Russell uses Developed, Advanced Emerging, Secondary Emerging and Frontier, scores a "Quality of Markets" matrix and runs a watch list: a market normally stays on it for at least a year before it moves. Results come out in March/April and September.

Korea: the long-running disagreement

FTSE has classified South Korea as developed since 2009. MSCI still lists Korea as emerging in 2026 for practical reasons: the won is not freely convertible offshore, overnight onshore currency liquidity is thin, and foreign investors long needed a registration certificate. Korea abolished that certificate in December 2023 and extended onshore currency trading hours in 2024; MSCI's June 2026 review acknowledged progress but did not start a consultation.

Greece: down and back up

MSCI had Greece in its developed index from 2001. During the debt crisis, capital controls and a shrinking market made Greece fail the accessibility and size tests; MSCI moved it to emerging status in 2013 and FTSE to Advanced Emerging in 2016. In 2026 both announced the way back: FTSE reclassified Greece as developed effective 21 September 2026, and MSCI will do so at its May 2027 index review. MSCI estimated Greece at about 0.57 % of its emerging index but only about 0.40 % of the MSCI Europe index: a small fish in one pond becomes an even smaller fish in a bigger pond.

Why a reclassification moves prices

Index funds must hold what the index holds: when a country leaves the emerging index, every EM tracker sells it on the effective date; when it enters a developed index, every developed-market tracker buys it. Active managers often trade earlier, so prices react on the announcement date. The size of the passive flow depends on the country's weight in each index and on how much passive money tracks each index.

Worked example

Hypothetical example: a country moves from an emerging to a developed index. All numbers are invented round figures.

• Free-float market capitalisation of the country's index companies: €60 billion.
• Free float of the emerging index: €12,000 billion. Weight = 60 / 12,000 = 0.50 %.
• Free float of the developed index: €150,000 billion. Weight = 60 / 150,000 = 0.04 %.
• Passive money tracking the emerging index: €1,500 billion; tracking the developed index: €8,000 billion.

Step 1: forced selling by EM trackers = 0.50 % × €1,500 bn = €7.5 bn.

Step 2: forced buying by DM trackers = 0.04 % × €8,000 bn = €3.2 bn.

Step 3: net passive flow = €3.2 bn − €7.5 bn = −€4.3 bn, about 4.3 / 60 = 7.2 % of the country's free float.

Although the country is "promoted", the mechanical flow is negative because it almost disappears in the much larger developed index. Whether prices actually fall depends on active buyers and on how early the move was priced in. Fees, taxes and review timing are ignored.

Common mistake

Practice activity

On paper: a frontier market with a free float of €20 billion is promoted to an emerging index. The frontier index has a free float of €400 billion with €25 billion of passive money; the emerging index has a free float of €12,000 billion with €1,500 billion of passive money. Calculate (a) the weight in each index, (b) the passive outflow and inflow, (c) the net flow as a percentage of the country's free float.

Key takeaways

• "Emerging" is a rule-based index label; MSCI tests income, size/liquidity and accessibility, FTSE uses four tiers and a watch list.
• Korea (developed at FTSE since 2009, emerging at MSCI in 2026) and Greece (developed, emerging from 2013, developed again from 2026/2027) show that providers disagree and moves go both ways.
• Passive flow = weight × tracking assets in each index; the net sign is not obvious.

Next step

In the next lesson you will build a country-risk scorecard that looks past the index label at ratings, reserves, debt and politics.