There is perhaps no better example of ETF first-mover advantage than the case of the iShares MSCI Emerging Markets ETF (EEM). The first U.S.-listed emerging markets ETF, EEM was the undisputed king of the space for many years.
Launched in 2003, the ETF went on to accumulate nearly $50 billion of assets in its first seven years on the market. No one could hold a candle to the brand and liquidity advantages EEM had—at least for a while.
That started to change in 2005. That year, the launch of the Vanguard FTSE Emerging Markets ETF (VWO) instantly neutralized at least one edge EEM had—brand recognition.
With the Vanguard name, VWO was an immediate contender, picking up assets from investors who appreciated the firm’s dedication to low cost, no-frills index investing. VWO’s expense ratio was less than half of EEM’s at the time (with the gap only growing since then, with the latter charging 0.7% and the former 0.10%).
Vanguard’s entry into the emerging market ETF space was a blow to EEM’s dominance, but the latter’s two-year head start meant it continued to attract interest from investors who appreciated the fund’s tradability, as well as its deep and liquid options market.
In 2011, VWO finally surpassed EEM in terms of AUM, when both had close to $50 billion in assets. Since then, VWO has grown to a size of $80 billion, while EEM has shrunk to $30 billion.
But far from being a story of an overpriced fund that was crushed by low cost competition, the example of EEM actually illustrates the power of first mover advantage.
After all, EEM still has a whopping $30 billion of assets generating $212 million of annual implied revenue (on top of the more than $3 billion the ETF has generated since inception).
The story didn’t end with VWO. To confront the threat from Vanguard’s cheaper product, iShares launched its own low cost emerging market ETF in 2012, the iShares Core MSCI Emerging Markets ETF (IEMG). Today IEMG is 1 basis point more expensive than VWO (0.11% versus 0.10%), but when it made its debut, it was 2 basis points cheaper (0.18% versus 0.20%). It was also 50 basis points cheaper than EEM.
IEMG was an instant hit, growing its AUM from nothing to $40 billion in five years, and $80 billion today—matching VWO. Yet far from destroying iShares’ cash cow, IEMG didn’t seem to have a discernable effect on EEM’s popularity. Sure, EEM’s total assets have remained stagnant since IEMG’s launch, but they were already stagnating before that due to competition from VWO.
AUM For EEM, VWO, IEMG
Thanks to its first-mover advantage, EEM seems to have locked in a sizable base of assets that isn’t going anywhere. It’s also the go-to ETF for traders who prioritize liquidity and options exposure over cost.
The fund’s assets have gyrated between $20 billion and $40 billion for years, and that’s in the context of an emerging market space that has done nothing for more than a decade (today the MSCI Emerging Markets Index is trading at the same level it was back in 2007).
If and when emerging market stocks broadly start to make new highs again, EEM could see its assets swell to more than $50 billion.
Not too bad for an ETF that everyone thought was done for.