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Saturday, March 9, 2013

A Better Way to Index Emerging Markets

A lot has been written about the "south korea issue" created by the largest emerging market ETF  Vanguard's VWO.

Vanguard announced last year that it was switching index benchmarks from MSCI  to FTSE which does not include South Korea as an emerging market. The transition is being made gradually. But for those looking to retain a significant South Korea exposure the search was on for a low cost alternative.MSCI has South Korea as its second largest country exposure at a bit over 15%. VWO is gradually transitioning to the new index and currently has a bit over 11% weighting in South Korea.

Ishares emerging markets ETF (EEM) retains the MSCI benchmark but at a management fee of .69% quite an increase for those previously paying .18% for VWO.

But Ishares has stepped up with a very attractive new emerging markets ETF: IEMG which has a management fee of

IEMG as other attractive aspects as well: it has larger number of holdings and thus more exposure to small and mid cap stocks.

Recently another interesting alternative has debuted among emerging markets ETFs. The low volatility strategy (which I described here) is now offered in an ishares ETF EEMV.

Adding EEMV to an emerging markets allocation is particularly interesting because it is weighted in different industries than IEMG (or VWO or EEM). The low volatility screen reduces the weighting to natural resource based holdings and shifts towards those more linked to the local economies.

Here is a comparison by industry of the emerging market ETFs As can be seen the only significant difference among the ETFs is EEMV (minimum volatility) vs. the others.

IEMG VWO  EEM EEMV
Basic Materials           11.63% 12.06% 11.78% 5.39%
Communication Services    6.97% 8.67% 8.00% 12.74%
Consumer Cyclical         9.27% 8.70% 8.57% 6.05%
Consumer Defensive        8.33% 8.20% 8.56% 14.34%
Energy                    9.69% 11.59% 10.84% 6.62%
Financial Services        23.32% 22.84% 24.29% 24.92%
Healthcare                1.65% 1.11% 1.08% 4.77%
Industrial 8.55% 7.58% 7.67% 8.25%
Real Estate               3.15% 1.65% 1.89% 1.69%
Technology                14.42% 14.49% 14.32% 9.08%
Utilities 3.02% 3.11% 2.99% 6.16%


As a consequence the EEMV returns have been strikingly different than other the other ETFs listed above.  Although of course one should not draw too many conclusions from the short trading history of EEMV.

EEMV is below in green EEM in gold  VWO in blue

This chart shows growth of 100,000


And below the top bar chart is returns and the bottom is volatility
So far an impressive performance for EEMV with far higher returns at significantly less volatility. It would be too early to declare an absolute preference for EEMV but the data certainly argues for including it in a portfolio.

( I left out IEMG here because it has been on the market for such a short period of time but at least for now it trades in line with EEM and VWO)







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