Checking In On iShares' IEMG

November 12, 2012

iShares created a big splash when it entered the fee wars and created new and cheaper versions of some of its most popular ETFs a few weeks ago.


I wrote about the iShares Core MSCI Emerging Markets ETF (NYSEArca: IEMG) a few days before it launched, calling it the “new and improved EEM,” but noting a few caveats.

Now that the fund has actually launched and has a few weeks of trading history under its belt, I’d like to revisit those caveats to determine whether IEMG is truly a better version of the long-standing iShares MSCI Emerging Markets Index Fund (NYSEArca: EEM).

One of the exciting things about IEMG is its broad coverage of 99 percent of investable emerging markets companies, compared with EEM’s 85 percent coverage.

The problem with that, however, is that expanding that coverage is expensive, so concessions have to be made.

To keep costs down and spreads tight, iShares has heavily optimized the MSCI Emerging Markets Investable Market Index, which holds close to 2,600 companies. IEMG, in contrast, holds about 1,600.

A big part of this optimization strategy is to use iShares ETFs to access certain emerging markets. IEMG’s top holding is currently the iShares MSCI India Index Fund (NYSEArca: INDA), at over 6 percent. IEMG also holds the iShares MSCI Chile Investable Markets Index Funds (NYSEArca: ECH) and the iShares MSCI India Small Cap Index Fund (NYSEArca: SMIN), which together make up an additional 3 percent of the fund.

Together, those three ETFs add about 235 companies to IEMG’s portfolio, so there’s still a fair amount of optimization happening at the individual company level.

The question isn’t really whether it optimizes, though; it’s what the effect of the optimization has on IEMG’s bottom line.

The graph below shows the total return net asset value performance of IEMG since its Oct. 18, 2012 inception date, compared with that of its underlying index, the MSCI Emerging Markets IMI, along with EEM and EEM’s index, the MSCI Emerging Markets Index.



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