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Digging Into Emerging Market ETFs

Heather Bell

[This article appears in our May 2019 issue of ETF Report.]

Emerging markets has been an area under a lot of scrutiny over the last few years. The space has underperformed developed markets in the past 12 months, and many feel that fundamentals indicate it’s due for a turnaround.

The 10 largest ETFs covering the broad emerging markets space range in size from $650 million to $63 billion. The group of 10 is split evenly between smart-beta and plain-vanilla cap-weighted strategies. BlackRock’s iShares unit alone dominates the space, with three funds that have a total of nearly $100 billion in assets under management (AUM).

The cap-weighted funds in the category have largely performed in lockstep for the past five years, but there are some subtle differences—and even more than that, once you expand your view to include the smart-beta offerings and dig into the details.

 

 

Biggest & Cheapest

The Vanguard FTSE Emerging Markets ETF (VWO) is the largest of the funds in this group, with more than $63 billion in AUM. It’s also one of the cheapest, at an expense ratio of 0.14%, on par with the second-largest fund in the space, the $59 billion iShares Core MSCI Emerging Markets ETF (IEMG). However, the SPDR Portfolio Emerging Markets ETF (SPEM) is the cheapest, at 0.11%; it is also the sixth-largest fund in the space, at $2.8 billion in assets.

 

Ticker Fund Exp Ratio Inception AUM # of Holdings 1-Year Net Flows
VWO Vanguard FTSE Emerging Markets ETF 0.14% 4/3/2005 $63.06B 4,138 $1.71B
IEMG iShares Core MSCI Emerging Markets ETF 0.14% 22/10/2012 $58.58B 2,223 $14.76B
EEM iShares MSCI Emerging Markets ETF 0.67% 7/4/2003 $34.28B 958 ($4.12B)
SCHE Schwab Emerging Markets Equity ETF 0.13% 14/1/2010 $5.74B 1,007 $939.9M
EEMV iShares Edge MSCI Min Vol Emerging Markets ETF 0.25% 18/10/2011 $5.64B 314 $1.10B
SPEM SPDR Portfolio Emerging Markets ETF 0.11% 19/3/2007 $2.76B 1,531 $1.15B
GEM Goldman Sachs ActiveBeta Emerging Markets Equity ETF 0.45% 29/9/2015 $1.75B 403 $137.10M
PXH Invesco FTSE RAFI Emerging Markets ETF 0.50% 27/9/2007 $1.29B 357 $254.22M
JHEM John Hancock Multifactor Emerging Markets ETF 0.55% 27/9/2018 $785.40M 579 $749.13M
FEM First Trust Emerging Markets AlphaDEX Fund 0.80% 18/4/2011 $654.23M 151 $94.62M

 

Smallest Of The Big

The most expensive of the top 10 ETFs is the First Trust Emerging Markets AlphaDEX Fund (FEM), at 0.80%, and in keeping with the cost-conscious nature of the ETF investor, FEM is also the smallest fund in the top 10 in terms of assets. The correlation between AUM and cost is not precisely linear, but the deviations can largely be explained.

VWO, for example, has the backing of the powerful Vanguard brand, which more than makes up for the few basis points in cost difference between it and the SPDR Portfolio Emerging Markets ETF (SPEM).

Similarly, the iShares Core MSCI Emerging Markets ETF (IEMG) has not only the strength of the iShares brand attached to it, but also offers wider and deeper coverage of the emerging market space than all in the space but VWO.

1st To Space Not A Lock

The Shares MSCI Emerging Markets ETF (EEM) was the first emerging market ETF, with a two-year head start on VWO. It had accumulated much of its asset base before being upstaged by newer funds, including  iShares’ cheaper IEMG. In any case, it’s seeing its competitors chip away at its assets slowly but surely.

The fund is the only one of the top 10 emerging market ETFs to see outflows during the 12 months ended March 29, 2019, with a whopping loss of $4.1 billion. Contrast that with IEMG, its new and improved version (covering a wider swath of stocks at a much lower price point), which pulled in a stunning $14.8 billion during the same period.

The iShares Edge MSCI Min Vol Emerging Markets ETF (EEMV), costing 0.25%, is the fifth-largest ETF in the group, at $5.6 billion in AUM, ranking one notch above the much cheaper SPEM. However, it’s fairly low cost for a smart-beta ETF, and has significantly outperformed its cap-weighted competitors over the past 12 months of market turmoil.

Once you get below SPEM, the remaining four ETFs in the group are all smart-beta funds, and from there, the cheaper funds consistently have the greater assets.

Flows

As noted, iShares’ cap-weighted funds represented the extreme ends of the flows spectrum for the 12-month period. IEMG’s $14.8 billion gain is truly breathtaking, and blows the $1.7 billion gain for VWO, the emerging markets ETF with the second highest inflows, right out of the water. At the same time, EEM’s loss of more than $4 billion over the 12 months is pretty distant from the fund, with the lowest level of inflows—FEM had a little less than $95 million.

EEM is clearly being penalized by investors for its high price, but IEMG was also designed as a better mousetrap solution for investors. Since the start of 2013 (the newer fund rolled out in October 2012), EEM has seen more than $10 billion in outflows, while IEMG has seen $56 billion worth of inflows.

Of the smart-beta ETFs, only one ranked in the upper half of the flows table for the past 12 months. EEMV pulled in $1.1 billion, while JHEM, PXH, GEM and FEM all pulled in less than $1 billion.

Holdings
VWO offers the most comprehensive coverage, with more than 4,100 securities in its portfolio, almost twice the number held by IEMG, at 2,223. Meanwhile, SPEM and SCHE have 1,531 and 1,007 securities, respectively. The portfolios of the smart-beta funds range in size from 579 securities for JHEM to 151 for FEM.

When it comes to sectors, the top three for the cap-weighted funds are financials, technology and energy across the board, though technology usurps financials for the No. 1 spot in IEMG and EEM. These are also the same sectors that two smart-beta ETFs in the space—the Invesco FTSE RAFI Emerging Markets ETF (PXH) and the John Hancock Multifactor Emerging Markets ETF (JHEM)—list as their top three.

Smart-Beta Twist

For some of the smart-beta ETFs, the situation is a little different. For example, while weighting financials at nearly 30% of its portfolio and technology at roughly 16%, consumer noncyclicals is the No. 3 sector for EEMV, with a weight of 11.5%.

GEM also includes consumer noncyclicals as its third-largest sector. But FEM is the only one of the 10 funds to include basic materials in its top three sectors as its second-largest sector, with a weight of 18.31%. That’s the highest weight any of the funds give to basic materials, with the rest weighting it between 5-8% of their respective portfolios.

 

WEIGHTINGS DATA          
Securities Weight Countries Weight Sectors Weight
EEMV          
PT Bank Central Asia Tbk 1.59% Hong Kong 18.80% Financials 29.92%
Taiwan Cooperative Financial Holding Co. Ltd. 1.56% Taiwan 14.96% Technology 15.84%
Taiwan Mobile Co. Ltd. 1.48% Korea 9.08% Consumer Non-Cyclicals 11.48%
GEM          
Tencent Holdings Ltd. 4.30% Hong Kong 21.69% Technology 25.94%
Alibaba Group Holding Ltd. Sponsored ADR 3.55% Korea 16.14% Financials 25.39%
Samsung Electronics Co., Ltd. 3.51% Taiwan 11.48% Consumer Non-Cyclical 11.11%
PXH          
China Construction Bank Corporation Class H 4.50% Hong Kong 31.61% Financials 35.26%
Taiwan Semiconductor Manufacturing Co., Ltd. 3.42% Brazil 14.88% Energy 20.20%
Industrial and Commercial Bank of China Limited Class H 3.11% Taiwan 14.54% Technology 12.41%
JHEM          
Reliance Industries Limited Sponsored GDR 144A 4.20% Hong Kong 25.25% Financials 29.53%
Tencent Holdings Ltd. 4.03% Korea 14.75% Technology 23.45%
Samsung Electronics Co., Ltd. 3.72% India 11.74% Energy 12.15%
FEM          
Companhia de Saneamento Basico do Estado de Sao Paulo SABESP 1.62% Hong Kong 30.73% Energy 24.15%
IRB Brasil Resseguros SA 1.56% Russia 10.60% Basic Materials 18.31%
Anglo American Platinum Limited 1.42% Brazil 9.74% Financials 13.92%

 

Performance

But let’s get down to the real nitty gritty: performance. Ten-year annualized data as of April 1 indicates SPEM, the least-loved of the cap-weighted funds, is the top performer of the four funds that have track records of that length with a return of 8.83%. VWO follows with a return of 8.44%. PXH is in last place, with a return of 7.25%.

 

PERFORMANCE as of 04/01/19
  3 Mos. 1 Yr 3 Yrs 5 Yrs 10 Yrs
VWO 13.45% -5.69% 10.35% 3.75% 8.44%
SPEM 12.08% -5.60% 11.55% 4.53% 8.83%
SCHE 12.07% -5.69% 10.85% 4.01% N/A
JHEM 11.89% N/A N/A N/A N/A
IEMG 11.37% -7.69% 10.85% 3.60% N/A
EEM 11.70% -7.68% 10.73% 3.16% 7.56%
PXH 10.49% -4.27% 14.78% 4.59% 7.25%
GEM 9.73% -8.04% 10.13% N/A N/A
EEMV 6.68% -2.07% 7.80% 3.20% N/A
FEM 11.38% -10.39% 12.71% 3.84% N/A

 

The five-year annualized data is just as closely clustered, with five-year annualized returns ranging from 3.16% for EEM to 4.59% for PXH. Similarly, for the three-year period, the top performer was PXH, with a significant margin of return of the second-place top performer, FEM, at 14.78% versus 12.71%. Meanwhile, EEMV was the worst performer in the group, with a return of 7.8%, putting it well behind GEM’s return of 10.13%.

But narrow it to a one-year time period, and EEMV takes the prize, with a decline of roughly 2% versus a decline of 10.39% for FEM. That’s quite a range. But for the three-month period, things are a little more dramatic. VWO takes a clear lead, with a three-month return of 13.45%, followed by a 12.08% return for SPEM. EEMV had the worst return in the group, with a return of 6.68%, trailing the 9.73% return for GEM.

In general, the top 10 emerging market ETFs tend to cluster in terms of returns, with a few isolated outliers, but those outliers can vary greatly.

Analysis

VWO is probably the natural choice for any buy-and-hold investor. It has a fairly low fee, consistent performance, the broadest possible portfolio and enough liquidity to easily exit or add to when the time comes to trade. Really though, except for the expensive EEM, any of the cap-weighted funds in this category would be a solid choice for a long-term investor.

SPEM is particularly intriguing because of its rock-bottom price, and given its more than $1 billion in inflows over the past 12 months, it looks like investors are noticing. EEM, as previously noted, is absolutely a trader’s tool.

Of the smart-beta ETFs, EEMV is the largest and most liquid by a long shot, but it’s a very tactical fund, designed as it is for investors to weather spates of volatility. The remaining smart-beta products take a broader view in terms of focus, with PXH relying on fundamentals and the others taking a multifactor approach.

With many expecting a sea change in the emerging market space, it’ll be interesting to see how the top 10 broad funds targeting the space weather what comes their way.

Contact Heather Bell at hbell@etf.com

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