Inside A Multifactor Emerging Market ETF

Emerging market ETFs are hot again this year. We size up the vanilla ‘IEMG’ vs. multifactor ‘EMGF.’

Reviewed by: Cinthia Murphy
Edited by: Cinthia Murphy

Emerging market ETFs are picking up steam again. Many market outlooks coming into 2019 called for better days in emerging markets, and in January, the iShares Core MSCI Emerging Markets ETF (IEMG) was the most popular ETF.

IEMG raked in $4.23 billion in fresh net assets during a month when investors yanked $25.5 billion from U.S. equity ETFs.

It’s easy to see why. If the goal is to access emerging market stocks, IEMG is big, cheap, liquid and hugely popular.

It’s a market-capitalization-weighted total market ETF that invests in more than 2,200 emerging market stocks for a 0.14% expense ratio—$14 per $10,000 invested. With this fund, you get comprehensive exposure that’s diverse across countries and segments without making any specific bets. IEMG captures MSCI’s view of the emerging market universe.

Bigger Not Always Best-Performing

All these traits, however, don’t necessarily equate with best-in-class performance. In reality, when it comes to emerging market ETFs—or any segment, for that matter—there are many different approaches to slicing and dicing the space, from different weighting schemes, to sector bets, to factor picking, to options overlays, and so on. With every tilt comes a different return stream.

Consider, for example, how a multifactor portfolio of emerging market stocks—also offered by iShares—stacks up relative to the vanilla IEMG—the iShares Edge MSCI Multifactor Emerging Markets ETF (EMGF), which launched in 2015.

EMGF fishes in the same MSCI universe, but picks and weights emerging market stocks deliberately to increase exposure to four factors—quality, value, momentum and small size. While the fund strives to keep region and sector allocations somewhat in line with the market-cap-weighted MSCI Emerging Markets Index, the strategy is designed to capture outperformance.

How does a multifactor approach such as EMGF compare to a market-cap one such as IEMG? In 2018, it didn’t do so well, underperforming market-neutral by 5 percentage points in a year when emerging market ETFs in general fared poorly, as the chart below shows. In this case, the smart-beta portfolio didn’t offer any cushion on the downside last year.



However, so far in 2019, we are seeing a reversal in leadership between the two funds, both of which are up this year. EMGF is ahead:


Charts courtesy of


From a country and sector allocation perspective, there are some differences in these portfolios. For example:

  • China: EMGF allocates almost 32% to China vs. 28% for IEMG
  • India: IEMG has double the weighting to India that EMGF has
  • Consumer Sectors: EMGF goes more heavily into consumer discretionary stocks, but it is notably underweight consumer staples relative to IEMG

And the list goes on. Using ETFs for proxies of market performance, consider that in 2018, Chinese equities were hit hard, with mainland stocks down some 28%, and Hong Kong-listed equities down about 13% (you can look at the performance of the Xtrackers Harvest CSI 300 China A-Shares ETF (ASHR) and the iShares China Large-Cap ETF (FXI)).

China, which was much more of a drag on portfolio returns last year, carries more weight in EMGF. India (as measured by the iShares MSCI India ETF (INDA)) was down a far more modest 6.6% last year.

These stats go to show that portfolio differences can have more or less of an impact on portfolio performance depending on the size of the allocation relative to the overall mix.


IEMG Portfolio

EMGF Portfolio

Source: data  


Factor Impact

Beyond country and sector tilts, EMGF is a multifactor ETF. A closer look at the factor bets in this fund also help explain what’s driving the divergence in returns relative to IEMG and the MSCI benchmark.

In 2018, investors largely shunned emerging markets, but those who accessed the region seemed to look for safer bets in what’s considered a riskier equity universe. From a factor perspective, according to Style Analytics data, in 2018, investors liked quality and low-volatility stocks. They also preferred higher-yielding and large-cap names.

In the case of EMGF specifically, its focus on quality was helpful to portfolio performance, but the fund’s tilt toward higher-volatility names—measured on an absolute daily basis—as well as its tilt toward smaller size relative to the benchmark, weighed on its performance last year.

“Even though EMGF doesn't necessarily call out ‘volatility’ in its model description, it’s a byproduct of their model, and that didn't help in 2018,” said Tom Idzal, managing director at Style Analytics. “Ironically, the model did a pretty good job of selecting better high-vol names, but the overall category took a beating.”

“This is a pretty good example of why I repeatedly say, ‘What else does an ETF bring you beyond the headline theme or strategy’?” he added. “It’s very hard for anyone to have predicted that higher vol would be problematic in EM during 2018, but sometimes exposures sneak up and take a bite.”

No One-Size-Fits-All Solution

IEMG has $59 billion in total assets, costs 0.14% in expense ratio and trades $1.2 billion on average a day, with an average spread of 0.02%. By comparison, EMGF has almost $300 million in total assets, costs three times as much, at an expense ratio of 0.45%, and trades $4.25 million on average a day, with an average spread 10 times as wide, at 0.22%.

There’s no question who’s the biggest, most popular, most heavily traded and cheapest ETF of the two.But that doesn’t mean IEMG is always the best one.

There’s no such thing as a one-size-fits-all emerging market ETF, and choices abound in a segment currently populated by 226 different ETFs. Different tilts and bets you make with different portfolios mean different return streams over time. Due diligence is key.

Contact Cinthia Murphy at [email protected]

Cinthia Murphy is head of digital experience, advocating for the user in all that does. She previously served as managing editor and writer for, specializing in ETF content and multimedia. Cinthia’s experience includes time at Dow Jones and former BridgeNews, covering commodity futures markets in Chicago and Brazil equities in Sao Paulo. She has a bachelor’s degree in journalism from the University of Missouri-Columbia.