Better Int'l ETFs By iShares

August 27, 2012

iShares puts a slew of ETFs that look as promising as they are overdue.

 

Earlier last week, iShares filed paperwork detailing plans for several new ETFs based on MSCI investable market indices. The importance? Investors might soon have a better way of gaining true exposure to the international equity space.

The new fund proposals from iShares were:

  • iShares MSCI Emerging Markets Investable Market Index Fund
  • iShares ACWI Investable Market Index Fund
  • iShares MSCI ACWI ex-US Investable Market Index Fund
  • iShares MSCI EAFE Investable Market Index Fund

 

The significance in the recent filing is that investors will finally have access to some of the broadest exposure available in the international equity space. The MSCI Investable Market Indexes (IMI) capture 99 percent of investable equities. This goes much deeper than the traditional MSCI indexes that iShares and Vanguard ETFs usually track that capture the top 85 percent of total market capitalization. The end result: Most international equity ETF investors have only been getting exposure to large and midcap stocks.

The filings above are welcome additions to their respective spaces in the market, but there are two sectors that pique my interest—that of the emerging markets space and the developed ex-U.S. market.

It seems a bit crazy to me that for so long, investors have been short-changed in their exposure to these markets. Coverage matters. It wasn’t too long ago that we saw what a difference broad exposure makes when tracking an index. In the emerging markets space, the battle between the iShares MSCI Emerging Market ETF (NYSEArca: EEM) and the Vanguard Emerging Markets ETF (NYSEArca: VWO) brought this to light.

VWO vs. EEM

When the market topped out in late 2007, VWO had outperformed EEM by nearly 5 percent. At the time, the difference was largely due to VWO’s full replication strategy—a contrast to EEM’s optimization strategy that focused on holding a subset of the index.

In the case of the new filings, portfolio strategy isn’t so much the issue as the additional sector exposure and coverage that investors may gain from the inclusion of the bottom 15 percent of the investable universe in these markets.

In the emerging markets space, the prospective iShares MSCI Emerging Markets IMI Fund will compete directly with EEM and VWO. Until the fund launches, we can only speculate on its actual sector exposure based on the current composition of the index.

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