EEM: iShares MSCI Emerging Markets
Prior to EEM's launch in 2003, there had been a long, simmering debate in the emerging market space suggesting you simply couldn't provide low-cost exposure to developing markets to U.S. investors.
EEM proved that wasn't true, and that was momentous, which put this cap-weighted index of emerging market firms on this list.
Similarly, there was an argument that active managers would always outperform in the emerging market space, which has always struck us as a sort of colonialist view of investing. But passive-vehicle EEM disproved that argument as well, and became an enormously successful product, helping establish iShares as the dominant ETF issuer.
"Before EEM, you had to set up local brokerage accounts, establish local relationships, and sometimes there were tax implications and other mechanisms that made [investing in emerging markets] very cumbersome. Brazil was always a nightmare," said Mark Dow, founder of Dow Global Advisors, who has more than 20 years of experience as a policymaker, investor and trader focused on global macro and emerging markets.
Certainly, one side caveat was tracking issues with EEM early on, which really helped launch Vanguard into the space two years after EEM with it FTSE Emerging Markets ETF (VWO | B-88), which is now the bigger of the two in terms of assets. iShares, obviously, eventually corrected that tracking problem, and EEM continues to be a major provider of assets.
"EEM allowed one simple way to get in and out," Dow added. "It's a trading vehicle, so that will make things get whipped around a little bit more. But it's also a vehicle that will allow the long-term investor a very easy and low-cost way to get exposure to a major asset class."
Since EEM doesn't significantly optimize its portfolio, its sector and country bets are fairly muted. (EEM includes South Korea as emerging; rival VWO doesn't.) The fund's index also doesn't go down the market-cap spectrum very far, which helps tilt the portfolio's average market cap slightly higher than the market's.
But credit EEM with being the first ETF to open "impossible" markets to indexing.