IEMG: New And Improved EEM

IndexUniverse.com

This week, iShares announced a group of new “core” ETFs, including the iShares Core MSCI Emerging Markets ETF (IEMG), which are expected to begin trading on or about Oct. 22, 2012, according to the iShares press release.

IEMG is expected to charge 0.18 percent per year, nearly 0.50 percent less than iShares’ already-live iShares MSCI Emerging Markets Index Fund (EEM), and 0.02 percent less than the Vanguard MSCI Emerging Markets ETF (VWO).

But the price difference isn’t the only improvement.

IEMG will track the IMI version of the MSCI Emerging Markets Index, which means it will cover 99 percent—rather than 85 percent—of the investable emerging markets market capitalization. That means you’ll have access to the smaller companies that stand to benefit most as emerging economies develop.

For those of you who prefer numbers to words, IEMG will track an index that holds over 2,600 companies, rather than one that holds about 820.

I’ve summarized EEM’s and IEMG’s size and style characteristics below:

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EEM vs. IEMG

The differences aren’t huge, but they are significant. IEMG is expected to have a slightly higher price/earnings ratio and yield, and of course a larger allocation to small- and micro-caps—16 percent vs. EEM’s 6 percent.

With all that said, I also have to point out a few caveats in defense of EEM:

  • The above analysis assumes that IEMG will fully replicate its underlying index, which may or may not be the case given the difficulty of investing in emerging markets micro caps.
  • Although I’d personally prefer more comprehensive coverage for less money, others may not want to take on the additional risk that accompanies small- and micro-cap companies. The 0.49 percent price drop may not be enough to entice such people away from EEM.
  • New funds generally take some time to pick up volume, and there’s no guarantee that investors will move from EEM—or from VWO—into IEMG. Thus, early trading costs for frequent traders could very possibly eclipse expense ratio savings, especially if those brokers who are now offering commission-free trades on EEM, like Fidelity, don’t extend those offers to IEMG.

 

Overall, however, I’m very excited about the launch of IEMG, and look forward to seeing how it does.


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

 

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