Flows Shift A Bit In EEM-VWO Asset Battle



On Oct. 2, Vanguard announced it would be shifting the underlying index on its popular Vanguard MSCI Emerging Markets ETF (VWO) from its current MSCI index to the FTSE Emerging Index during the first half of 2013.

BlackRock Chief Executive Laurence Fink, quoted by Reuters, told analysts in a conference call that it appears funds had been flowing into his firm’s iShares MSCI Emerging Markets Index Fund (EEM)—and not into VWO—as a result of Vanguard’s planned index change.

But did they?

IndexUniverse monitors daily ETF flows—you can check out our online tool here —so it’s an easy claim to check.


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Fund Flows:EEM vs. VWO


The iShares Emerging Markets ETF’s (EEM) flows over the past three weeks have indeed eclipsed VWO’s flows, but there are two notable points here.

First, the $1 billion-plus that has gone into EEM since the Vanguard announcement didn’t start flowing until Oct. 15—a good two weeks after the Vanguard announcement.

It’s possible that the money did indeed come from typical Vanguard investors who were sitting on extra cash and, after doing two weeks of due diligence, decided that it made sense to begin switching over to EEM.

But then again, it’s also possible that a few institutional investors decided it was a good time to up their emerging markets allocations.

Crucially, money hasn’t actually flowed out of VWO. In fact, about $42 million has flowed into it since Vanguard announced the index would be switching next year.

Broadly, both funds’ assets under management (AUM) have remained relatively constant aside from EEM’s slight bump last week.



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It makes sense, of course. Nothing has actually happened yet. If people were truly going to leave VWO for EEM over the exposure, I would think that they’d at least enjoy the lower expense ratio as long as they could before switching over.

In addition, capital gains taxes—especially for long-term emerging markets investors—definitely hurt. VWO is up over 96 percent since its inception in 2005. If I were holding a large VWO position in a taxable account, I would certainly be hesitant to take that hit.

Despite Mr. Fink’s conjectures, I would bet that the vast majority of VWO holders stay put. As Dave Nadig pointed out on Oct. 2, Vanguard was the most favorably viewed ETF issuer on the market in a Cogent study done in March 2012.

So, will some people who want to remain tied to MSCI switch over? Sure, it’s possible. But it would be fallacious to assume everyone will.

Moreover, unless they’re frequent traders or institutional investors who are planning to trade immediately, I would bet that the money flows into iShares’ new emerging markets fund, the iShares Core MSCI Emerging Markets ETF (IEMG), rather than EEM.

It has a lower expense ratio than EEM by nearly 50 basis points and has already attracted over $80 million since launching yesterday, according to the iShares website.

It’s not a trader’s fund yet—IEMG is currently trading with a 0.12 percent bid/ask spread, which is less than ideal—but I’d expect that to come down as the fund picks up assets.

At the time this article was written, the author had a position in VWO. Contact Carolyn Hill at chill@indexuniverse.com.


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