The iShares MSCI Emerging Market ETF (EEM | B-99) has had a tough year. The fund, which was the biggest emerging market ETF in the U.S. not that long ago, has been consistently bleeding assets while its performance sinks.
In the past 12 months alone, EEM has faced net outflows exceeding $12.21 billion. Today EEM is a $23.3 billion fund—still one of the 10 biggest ETFs in the market, but only a vestige of the $45-plus billion in assets it boasted only three years ago.
Perhaps the last time we saw a big demand-swing in favor of EEM over competing funds such as the Vanguard FTSE Emerging Market ETF (VWO | B-87) was when Vanguard decided to switch VWO’s benchmark from the institutional-favorite MSCI index to FTSE. Almost immediately following Vanguard’s announcement in the fall of 2012, EEM began picking up assets courtesy of VWO investors.
But that trend didn’t last, thanks largely to iShares’ own doing.
Since the company decided to launch a number of me-too “Core ETFs” that offered nearly identical exposure to funds it already sponsored—but for a fraction of the cost—the tide began to turn against EEM. That was almost three years ago.
The Core lineup iShares brought to market late in 2012 included the iShares MSCI Core Emerging Markets ETF (IEMG | A-99)—an ETF designed almost identically to EEM, but with a much lower price tag—73 percent lower, to be exact.
IEMG, which was launched in October 2012, also tracks an MSCI emerging market index, and it offers a bit more comprehensive exposure by expanding its reach into smaller-cap names, according to ETF.com data.
The portfolio carries an 18 basis point expense ratio, or $18 per $10,000 invested. That’s 50 bps cheaper per year than the expense ratio on EEM—not a negligible difference.
Liquidity Keeps Improving
IEMG has also seen its liquidity grow over time—it trades now about $137 million on average a day, and it does so with an average spread of only 2 basis points. EEM’s current average spread is about 3 bps on daily volume of nearly $2 billion.
These factors help explain why IEMG has attracted $3.37 billion in net new assets in the same 12-month period EEM bled $12.2 billion. Today IEMG has $7.2 billion in assets under management.
If you go back to October 2012 when it launched and look at flows since then, IEMG has attracted $8.1 billion in net creations in about three years, while EEM bled $7.8 billion—there’s a symmetry here that’s interesting.
If costs and exposure are helping fuel outflows from one fund into the other—to say nothing about changing market share of other competing ETFs in the market—the trend could also be explained by recent performance.
Emerging markets have been in a funk, and investors seem to be taking the massive decline in performance as an opportunity to exit their positions in EEM without facing capital gains issues. In turn, they are reallocating those assets in lower-cost vehicles such as IEMG.
In the past year, both ETFs have dropped about 20 percent, but EEM has done slightly worse, as the chart below shows. EEM is in fact trading at its lowest levels in four years.
Chart courtesy of StockCharts.com
None of this suggests EEM is going away. At least not any time soon. But it does reinforce the fact that all else being—relatively—equal, costs matter, and investors are increasingly aware they have options.
Contact Cinthia Murphy at email@example.com.