Emerging market upgrades are often celebrated by local governments and media as a symbol of economic progress and financial maturity. In Vietnam’s case, the anticipated upgrade from “Frontier Market” to “Secondary Emerging Market” status by FTSE Russell has generated a wave of optimism, with expectations of large inflows of foreign capital. However, the reality is far more nuanced. Not all index upgrades carry equal weight in the global investment ecosystem. In fact, an upgrade by FTSE Russell has historically had minimal impact on actual foreign capital flows compared to the far more influential MSCI (Morgan Stanley Capital International) classification system.
This article explores the structural differences between the two major index providers—FTSE and MSCI—and explains why FTSE’s reclassification tends to have limited financial consequences, especially when viewed through the lens of passive fund allocation, global liquidity, and investor behavior.
1. The Distinction Between FTSE and MSCI
Although both FTSE Russell (a subsidiary of the London Stock Exchange Group) and MSCI are global index providers, they serve very different investor bases.
- MSCI indices are the de facto benchmark for most global equity funds, especially U.S.-based institutional investors, who dominate global capital markets. More than $13 trillion USD in assets are benchmarked to MSCI indices, making them a critical component of global portfolio allocation decisions.
- FTSE Russell, by contrast, has around $17 trillion USD benchmarked across all its products, but only a small fraction of that amount is tied to its emerging market classifications. The vast majority of FTSE’s benchmarked assets are concentrated in developed market indices such as the FTSE 100, FTSE Global Developed, and Russell 1000/2000.
Crucially, the FTSE Emerging Markets Index represents a much smaller and less actively tracked benchmark than the MSCI Emerging Markets Index, which is the preferred reference for most global emerging market funds (both active and passive).
2. Passive Investment Flows: The Key Difference
When a country is upgraded by an index provider, the potential capital inflow primarily comes from passive funds—ETFs and index funds that must buy assets according to their benchmark weights.
In past examples:
- Saudi Arabia’s MSCI upgrade (2019) triggered roughly $6–7 billion USD in passive inflows, followed by additional active investment.
- Kuwait’s MSCI upgrade (2020) led to approximately $2.5 billion USD in inflows.
- Pakistan’s FTSE upgrade (2016), however, generated less than $100 million USD in net inflows, and the effect was short-lived, with outflows resuming within a year.
This comparison underscores a crucial fact: FTSE upgrades do not move the needle because few major global funds track FTSE’s emerging market classifications.
FTSE’s largest emerging market ETF—the Vanguard FTSE Emerging Markets ETF (VWO)—has significant assets (around $75 billion USD), but even that fund already includes frontier market exposure, and its rebalancing impact from adding Vietnam would be marginal—measured in tens, not hundreds, of millions of dollars.
3. The Geography of Capital Power
Another reason for the differing impact between FTSE and MSCI upgrades lies in where the capital originates.
- The U.S. dominates global investment flows through pension funds, mutual funds, and ETFs, most of which benchmark to MSCI indices.
- The UK, the home of FTSE Russell, plays a secondary role in global capital allocation. London remains a major financial hub, but post-Brexit capital markets have lost much of their global dominance, and UK-based funds manage a fraction of the assets compared to their U.S. counterparts.
In essence, FTSE’s recognition reflects credibility, but MSCI’s recognition commands money. Being included in MSCI’s Emerging Market Index forces trillions of dollars in passive assets to rebalance; being added to FTSE’s does not.
4. The “Sentiment Effect” vs. Real Money
FTSE upgrades often trigger a short-term sentiment rally, as domestic investors and local media celebrate the symbolic progress. However, empirical studies show that most of the market reaction is psychological and temporary.
For instance:
- Pakistan (2016) saw its benchmark KSE-100 Index rise 20% in anticipation of its FTSE and MSCI upgrades, but within two years, the market lost nearly 40% of its value as real capital inflows underperformed expectations.
- Nigeria (2012) experienced a similar “FTSE optimism rally” followed by minimal foreign inflows due to liquidity and regulatory constraints.
This demonstrates a key lesson: classification does not equal liquidity, and symbolic upgrades cannot offset structural investment barriers like foreign ownership limits, market transparency, and currency convertibility.
5. Vietnam’s Case: A Step Forward, But Not a Game Changer
For Vietnam, an FTSE Russell upgrade—likely to take effect in 2026—is a positive signal of market progress, especially in terms of clearing settlement and ownership hurdles. It may improve the country’s visibility among institutional investors and make future MSCI inclusion easier.
However, expecting substantial capital inflows from FTSE alone is overly optimistic.
- The aggregate passive flow potential is estimated at $300–600 million USD at best—less than 0.3% of Vietnam’s current market capitalization (~$250–300 billion USD).
- MSCI inclusion, on the other hand, could attract 5–10 times that amount, as MSCI EM ETFs would need to adjust their holdings.
In short, FTSE is the rehearsal; MSCI is the real show.
6. What Really Drives Sustainable Inflows
Beyond index classification, the real magnet for foreign capital lies in market fundamentals and institutional reforms:
- Currency stability and repatriation freedom
- Corporate transparency and governance
- Liquidity depth and free-float ratio
- Legal clarity on foreign ownership limits
Without addressing these issues, any upgrade—FTSE or MSCI—will only have transient effects. Investors seek structural reliability, not cosmetic recognition.
Conclusion
Vietnam’s upcoming FTSE Russell upgrade represents a technical and psychological milestone, but not a financial breakthrough. It will likely bring short-term optimism and modest inflows, yet its macroeconomic and capital market impact will be limited.
History across emerging markets shows that FTSE upgrades are symbolic, whereas MSCI upgrades are transformational. Only when Vietnam satisfies MSCI’s more stringent requirements—particularly regarding market accessibility and foreign ownership—will the country unlock the true depth of global institutional capital.
Until then, investors should temper their expectations: FTSE is a compliment, not a catalyst.