Global Emerging Markets are one of the most popular and volatile asset classes at the same time. They are a great investment opportunity which can reward investors massively on the upside or punish severely on the downside. Many have been struggling to find a golden investment rule to harness the volatility of this particular asset class.
One of the preliminary conditions to pass any basic due diligence process is to understand in details what you buy, what are the underlying positions. If you don’t do this step properly you may end up asking yourself, why the market goes up while your investment underperforms or in the worst case scenario goes in the opposite direction.
Investors can access global emerging markets via two extremely liquid exchange traded funds managed by two huge investment houses: BlackRock (iShares) and Vanguard. The iShares ETF (EEM) follows the MSCI EM Index while the Vanguard product (VWO) replicates the FTSE EM Index which excludes South Korea. That one country exclusion makes a big difference when it comes to performance numbers, as South Korea comprises around 15% of the EEM. The underlying index makes a fundamental difference in that case. During the past 3 years the VWO has outperformed the EEM by around 2.9% while only during the past year by almost 4%! That’s quite a lot.
Take a look below at the price ratio of the Vanguard FTSE EM ETF (VWO) relative to the iShares MSCI EM ETF (EEM). As a reminder, a rising price ratio means the numerator/VWO is outpeforming (up more / down less) the denominator/EEM.Chart: VWO vs. EEM ratio
Of course, the underlying indexes and country allocations are not the only reasons which cause the divergence between both ETF’s. There are also other factors which could be more of a qualitative nature like the expense ratio. The iShares $EEM charges 0.67% while the Vanguard $VWO only 0.15%! The latter one is very cheap and probably one of the reasons which contribute to the size. The Vanguard ETF holds $64bn AUM while its direct competitor iShares $39bn .
Investors who are not sure which ETF to buy, should keep in mind the following two fundamental facts: the EEM allocates to South Korea and is more expensive. So if you don’t consider Korea as an emerging market and want to access a cheaper option you should buy the VWO.
The iconographic presented below shows more difference between the two ETFs.
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