What Do VWO, EEM And EWZ Really Hold?

March 14, 2011

Knowing what you really own in an emerging markets fund is harder than you may think.


If you own shares in one or more of the largest U.S.-listed emerging markets funds, you might be surprised to learn that some of the largest holdings in the funds have a heavier weighting than you previously thought—around 80 percent more, in some cases.

The funds in question are the Vanguard MSCI Emerging Markets ETF (NYSEArca: VWO), the iShares MSCI Emerging Markets ETF (NYSEArca: EEM) and the iShares MSCI Brazil ETF (NYSEArca: EWZ); the issue of weighting stems from companies that have different classes of stock, such as preferred and common.

A prime example is Petrobras, Brazil’s mostly state-owned oil firm, which is held by VWO, EEM and EWZ. MSCI treats different share classes of the energy company distinctly, as do the three ETFs, which are based on MSCI indexes. This often results in investors overlooking some of these different share classes in the fund’s holdings and perhaps losing their bearings a bit as far as overestimating diversification.

Frank Nielsen, executive director of equity research at MSCI, said that when his firm creates an index, it analyzes different share classes for eligibility in the index. He added that the weightings are then determined by the percentage of the shares’ market cap that floats freely, and not by their trading volumes. He stressed that MSCI’s methodology is driven by how clients invest in markets and how they view different share classes.

“From an investor’s perspective, you buy the individual shares and not the combined shares, so that’s clearly one reason why you don’t want to combine the share classes,” Nielsen said in a telephone interview.

But regarding company exposure and Petrobras’ share classes, Nielsen added: “In some cases, they trade differently, but in terms of company exposure, yes, it’s clearly one exposure to Petrobras, and it’s very significant in the Brazilian market.”

To further complicate things, ETF providers also have the option to use American depositary receipts (ADRs). Therefore, to understand an ETF’s full exposure to its top holdings, all share classes and ADRs of the same company should be aggregated in any calculation.


Let’s look at VWO first. VWO surpassed EEM as the largest emerging markets ETF in the world on Jan. 18, and is currently the third-largest U.S. ETF, with $45 billion in assets under management. Both ETFs are based on the MSCI Emerging Markets Index, though VWO replicates it more closely than EEM.

As of Dec. 31, Vanguard’s website shows the top three holdings as China Mobile, Gazprom and America Movil. In percentage terms, those holdings come out to 1.53 percent, 1.52 percent and 1.46 percent, respectively. The company only discloses holdings quarterly, compared with monthly disclosure from most ETF firms.

But look again at a separate list the Valley Forge, Pa.-based firm keeps of its top 10 holdings at the end of last year, and the picture is different. The website shows VWO’s top three holdings as Petrobras ADRs (1.8 percent), Vale ADRs (1.8 percent) and China Mobile (1.5 percent). What’s happening here?



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