Hougan: ETFs Aren’t Ruining EMs

February 04, 2014

Data worries aside, what concerns me about Authers’ piece is his suggestions for what investors do to replace their emerging market ETF exposure: buy closed-end funds.

Specifically, he points out that the “Foreign & Colonial Investment Trust was investing in Brazil, Russia, India and China in the 1880s.”

That’s cool; I love old stuff.

Unfortunately, while the long-running fund may have helped finance the first railroads in India, it’s basically stopped investing in those countries: It’s currently just 8.3 percent exposed to emerging markets, according to its most recent fact sheet.

What’s worse, it charges 0.85 percent in annual fees. That’s mighty high compared with, say, 0.18 percent for the iShares Core MSCI Emerging Markets ETF (IEMG | B-98, Analyst Pick).

That kind of cost differential adds up. Authers’ beloved Foreign & Colonial Investment Trust has been running for 148 years and currently has $4.2 billion in assets. In a magnificent coincidence, if it runs for another 148 years, it will charge exactly $4.2 billion more in fees than IEMG (assuming markets are flat).

People obsess about the fact that you can trade ETFs on an intraday basis, as if that is somehow wildly different than the daily liquidity offered by mutual funds. The much bigger difference lies in costs.

Over the past decade, ETFs have made investing in emerging markets cheap and easy. Rather than worrying about the $4.4 billion that ETF investors have pulled out of emerging market ETFs in the past week, Authers might want to look at the $330 billion he says (or the $117 billion we say) ETFs have brought in to emerging markets over the last 10 years.

At the time this article was written, the author held a long position in IEMG. Contact Matt Hougan at [email protected].


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