Something has gone wrong with the FTSE 100. The index of the largest 100 U.K.-listed companies used to be a byword for blue-chip respectability. But that is no longer the case: Bankers are exploiting loopholes to fast-track emerging-market businesses into the index, side-stepping the scrutiny of an IPO. That is bad news for investors in funds benchmarked against the index who may be being exposed to far greater risk than they realize.

Take Evraz, a Russian steelmaker valued at around $8 billion that is 72.5% owned by an investment...