IEMG Becoming Best In Class

February 12, 2013

It’s been just four months since iShares launched IEMG, but you would never know given how swiftly the market has snatched up shares in the fund.

Few, if any, stories captured the headlines like the announcement last October that iShares was launching a suite of comprehensive “core” strategies aimed at retail investors.

Perhaps the most interesting of these launches was the iShares Core MSCI Emerging Markets ETF (NYSEArca: IEMG) which competes head-on with iShares’ existing powerhouse emerging markets fund, the nearly $58 billion iShares MSCI Emerging Markets Index Fund (NYSEArca: EEM).

The fund, which tracks a broader version of the MSCI benchmark tracked by EEM, not only offers improved coverage, it checks it at a significantly lower price (18 basis points vs. 66 basis points).

While the fund will likely never attract the near-$2 billion in daily volume that EEM gets, IEMG’s average volume should be sufficient for all but the most active traders. Over the past 45 days, volume on IEMG has averaged more than $10 million daily, and average spreads have narrowed all the way to 10 basis points.

The round-trip cost of IEMG, based on its expense ratio and average spreads, is now just 28 basis points, making it one of the cheapest emerging market funds to own. Indeed, just two broad developing-market funds, the Vanguard FTSE Emerging Markets Index ETF (NYSEArca: VWO) and the Schwab Emerging Markets Equity ETF (NYSEArca: SCHE) cost less to own.


The important thing to note, however, is that IEMG is now the cheapest option by which to get exposure to South Korea and to the largest emerging markets firm in the universe, Samsung electronics.

Sure, intelligent people disagree about whether South Korea is a developed or developing country, but if you agree with MSCI that it is not a developed market, IEMG is the most comprehensive and cheapest way to allocate to the developing world.

Vanguard’s own announcement that it would begin tracking FTSE indexes captured much of the industry’s attention as well, but the fact that it is currently in the process of transitioning away from its Korean exposure—FTSE considers Korea to be a developed market—means those who consider Korea to be developed will have to look elsewhere.

What’s more, IEMG’s portfolio currently has 1,817 stocks, which dwarfs that of both VWO at 620 holdings, and SCHE, with 552 holdings.

Also, 16 percent of IEMG’s portfolio is in small and micro-cap firms compared with just 4 percent for VWO and SCHE. In other words, IEMG provides the most complete coverage of the space by a wide margin.

In the past three months the fund’s 6.3 percent performance lagged that of SCHE and VWO by 73 basis points and 101 basis points, respectively, so the fund’s extra coverage and Korean holdings have been a detriment of late.

Still, if you want the broad coverage of emerging markets, no fund can compete with IEMG’s portfolio.

Moving forward, it remains to be seen how quickly the fund’s current $400-plus million asset base will grow.

If it continues to blossom the way that it has, the cost case for the fund will continue to strengthen. If that happens, it will be harder and harder to convince investors that anything other than IEMG will provide the best emerging markets exposure.



At the time this article was written, the author held no positions in the securities mentioned. Contact Paul Baiocchi at [email protected].


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