EEM: Beyond The Bloodbath

February 04, 2011


Pinprick Accuracy

Whatever ends up happening to the long shadow iShares casts over the ETF industry, the point is that a more granular approach to getting investment exposure to the emerging markets has been brewing for a while and is now gathering momentum.

That has made it easier for newer funds, like the SPDR S&P Emerging Markets Small Cap ETF (NYSEArca: EWX) or the WisdomTree Emerging Markets SmallCap Dividend Fund (NYSEArca: DGS) to get traction. EWX has gathered more than $1.15 billion since it came on the market in May 2008, while DGS has attracted almost $1 billion since it launched in October 2007.

Even Rob Arnott, perhaps the leading figure of the fundamental indexation movement, is getting a piece of the action via the PowerShares FTSE RAFI Emerging Markets Portfolio (NYSEArca: PXH). The ETF almost doubled its assets last year, and is now a $526.8 million fund. It launched in September 2007.

Investors have clearly shown they’re willing to shed their home-country bias, and I expect this battle for market share to take place on the frontier—literally and figuratively.

First, while the $19.34 billion Vanguard’s VWO gathered last year far exceeded all other U.S. ETFs—and not just EEM—I wonder again whether that’s not yesterday’s emerging markets story. Could Vanguard, long a champion of owning the whole market and dispensing with the guesswork as to which parts will outperform, be a bit vulnerable as the emerging space gets sliced and diced into smaller pockets?

In all fairness, it does seem to be out in front with the Vanguard Global ex-U.S. Real Estate ETF (NasdaqGM: VNQI), an ETF it brought to market in November. VNQI holds REITs and also includes emerging-market real estate operating companies, or REOCs, something the folks out in Valley Forge, Pa. describe as an industry-first. The ETF now has $86.5 million.

Vanguard aside, there’s no better example of appetite in the U.S. for innovative emerging market investments than what happened last summer when the WisdomTree Emerging Markets Local Debt Fund (NYSEArca: ELD) and the Market Vectors Emerging Markets Local Currency Bond ETF (NYSEArca: EMLC) came to market.

Both ETFs went gangbusters—especially ELD, which now has $630 million in assets, compared with about $250 million for EMLC. The biggest difference between the two is that ELD has an active screening process that steers clear of Hungary, perhaps the most indebted Eastern European country right now.

Investors are clearly tuned in to what matters. They’re over fretting about holding debt denominated in currencies other than the dollar, and they’re parsing credit risks. At this rate, I wouldn’t be surprised to see Global X’s two new offerings that split the emerging markets into growth and value take off as well.

I also wouldn’t be surprised to see someone run with your idea, Matt, and design a fund around an index that combines emerging and frontier markets to decrease correlations to developed markets. Whether iShares ends up being that company is another story for another day.


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