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EEM Strikes Back In Emerging Market ETF Asset War
By Olivier Ludwig | 02 January, 2013

This article was originally published on our sister site, IndexUniverse.com

A record year of ETF inflows and a blossoming price war that dragged a reluctant iShares into the fray ended on a surprising note: the pricey iShares MSCI Emerging Markets Index Fund (NYSEArca: EEM) matched its much-cheaper rival from Vanguard in asset gathering.

In all of 2012, EEM pulled in $10.5 billion—about matching the Vanguard MSCI Emerging Markets ETF (NYSEArca: VWO), which gathered $10.6 billion, according to data compiled by IndexUniverse.

EEM and VWO are both listed in the US ETF market and target that country’s domestic investors, although they are also held by some non-US investors.

VWO is still bigger—$59 billion in assets compared with $48 billion for EEM. But it’s key to remember that VWO spent much of the past several years catching and surpassing EEM to become the biggest emerging markets ETF in the world.

VWO achieved that milestone largely because it has been substantially less expensive to own than EEM. Currently, VWO costs 0.20 percent a year, or $20 per $10,000 invested, compared with 0.67 percent for iShares' EEM. EEM will become even pricier in 2013, at 0.69 percent, or $69 for every $10,000 invested.

The recent dramatic reversal of previous asset flow patterns began when Valley Forge, Pa.-based Vanguard announced on Oct. 2 that it plans to abandon the MSCI index that its Vanguard MSCI Emerging Markets Fund and EEM both use, and instead organise the fund around a benchmark created by FTSE.

Almost immediately, EEM started gaining in assets against VWO. Some observers suggested that institutional investors who have grown used to benchmarking their performance against MSCI’s index family might not be too keen on changing to FTSE.

But the incipient signs of a shift in asset flows between EEM and VWO went largely unnoticed for a number of weeks—in part because just two weeks after Vanguard caused a stir in the world of index investing, iShares itself dropped a bomb of its own when it unveiled plans to launch a family of ultra-cheap “Core” funds.

Core Still Waiting To Score

When iShares unveiled its “core” line-up of funds in mid-October, many welcomed the move as a viable way for the San Francisco-based unit of BlackRock to seriously compete for dollars from retail investors, a sizable chunk of the investment world long-dominated by Vanguard.

A fair amount of hopeful talk circulated that the newly launched and much cheaper version of EEM, the iShares Core Emerging Markets ETF (NYSEArca: IEMG), might get a leg up in the asset-gathering game against the likes of Vanguard’s VWO and the Schwab Emerging Markets Equity ETF (NYSEArca: SCHE).

After all, the iShares IEMG comes with an annual expense ratio of 0.18 percent—cheaper than VWO’s annual cost of 0.20 percent, though 3 basis points more than Schwab’s SCHE.

Moreover, iShares even launched a high-quality advertising campaign on US television to begin introducing the cheap funds to the public. The advertising strategy focused on Sunday morning news programs much watched by viewers who are likely to have an interest and assets to invest.

But the iShares core funds—some brand new; some repurposed and rebranded; and, like IEMG, all now among the cheapest in their respective classes—haven’t really caught on, at least not yet.



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