iShares ‘Core’ ETFs Look Good A Year In

October 15, 2013

IEMG Takes Aim At EEM, VWO

On the international equities front, the developed ex-U.S. iShares Core MSCI EAFE ETF (IEFA | A-91), with nearly $1 billion in total assets, stood out in terms of performance, delivering gains of 22.5 percent amid net inflows of $829 million in the year, according to data compiled by IndexUniverse.

IEFA has clearly gathered momentum at a time when investors are upping their exposure to Europe as the region shows signs of growth after a debt crisis that threatened to break up the eurozone.

But it's perhaps the emerging market "Core" ETF that offers the more interesting tale, as its asset-gathering success comes somewhat at the expense—or in addition to—the success of another competing iShares emerging market ETF, the massive $43 billion iShares MSCI Emerging Market ETF (EEM | B-96).

iShares' "Core" lineup indeed added a brand new, me-too fund to the fold that went head-to-head with one of the firm's biggest ETFs, but with a much lower price tag.

Investors poured nearly $2.5 billion into the iShares Core MSCI Emerging Markets ETF (IEMG | B-98), a fund that at 0.18 percent in expense ratio, challenges EEM's 0.69-percent-a-year price tag. The fund also takes aim at the Vanguard FTSE Emerging Market ETF (VWO | B-86)—the largest emerging market fund today and one that also costs 0.18 percent in fees.

In that same 12-month period, EEM also gathered assets—$5 billion worth, in fact—despite IEMG's growing following, and at the expense of VWO's $5 billion net-asset loss in the period.

EEM's asset gain is most likely the result of Vanguard's decision to abandon VWO's MSCI benchmark for a FTSE index that excludes South Korea—a move by Vanguard that, like the "Core" rollout, also became public last October.

It's probably the case that EEM gaining the upper hand over its cheaper Vanguard competitor reflects institutional investors' preference for MSCI, or even investors' feelings toward South Korea's place among emerging markets.

Bonds Bleed

Meanwhile, only two "Core" ETFs bled assets, both of them fixed-income strategies that are linked to longer-dated U.S. bonds—a segment of the market that has been shunned by investors in recent months amid fears of higher interest rates ahead. The longer-dated a bond is, the more sensitive its price is to interest-rate fluctuations.

The $14.91 billion iShares Core Total U.S. Bond Market ETF (AGG | A-97) led in asset outflows, with net redemptions of $650 million in the past year. The fund was also one of the worst-performing ETFs, with losses of 4.7 percent in the period. AGG costs 0.08 percent a year, or $8 per $10,000 invested.

Finally, the $36.5 million iShares Core Long-Term U.S. Bond ETF (ILTB | B-91) also saw net outflows of $149 million in the past year, but ILTB has the distinction of being the worst-performing "Core" ETF in the 12-month period, with losses of 14.3 percent. The fund has an annual expense ratio of 0.12 percent.


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