Daily ETF Watch: iShares' Beyond-EEM Fund

October 15, 2014

iShares, the world’s biggest exchange-traded fund company, on Thursday is launching a next-generation emerging markets fund that is designed to steer clear of BRIC countries—Brazil, Russia, India and China—that have been bread-and-butter emerging markets for ETF investors for more than a decade.

The iShares MSCI Emerging Markets Horizon ETF is going live tomorrow, with a primary listing on the BATS Exchange and the ticker “EMHZ.” It follows by 11 years the pioneering iShares MSCI Emerging Markets ETF (EEM | B-98), which has grown into a highly liquid $36 billion fund that is used by traders, institutions and buy-and-hold investors alike.

EMZ will hold the bottom 25 percent of EEM’s market capitalization by country. In other words, emerging markets like Mexico, Malaysia, Indonesia and Thailand dominate the fund’s weighting, as opposed to the BRICS, Taiwan and South Korea. The BRICs make up about a third of EEM, and South Korea and Taiwan make up just over a quarter.

The focus on smaller emerging markets brings with it a renewal of the initial promise of emerging markets investing; namely, returns that are relatively uncorrelated with those in the developing worlds. Some of the diversification potential has declined in recent years for investors using broad, BRIC-centric funds like EEM or the $46 billion Vanguard FTSE Emerging Markets ETF (VWO | C-89).

iShares’ EMHZ isn’t the first ETF to specifically canvass second-tier emerging market countries. The first to market and biggest among those is the $309 million EGShares Beyond BRICs ETF (BBRC | D-36). It launched in August 2012, and reaches beyond emerging markets to also include so-called frontier markets.

EMHZ will have an annual expense ratio of 50 basis points, or $50 for each $10,000 invested, while Emerging Global’s BBRC has an expense ratio of 58 basis points.

 

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