With only $236 million of net inflows for international equity products in September, it is easy to think ETF investors focused attention elsewhere. But while developed equity products experienced outflows, emerging markets ETF shined brightly. Last month, Vanguard FTSE Emerging Markets (VWO 37 Overweight) and iShares Core MSCI Emerging Markets (IEMG 45 Overweight) gathered $982 million and $710 million, respectively, according to Factset.
Though both ETFs have modest expense ratios, these popular market-cap weighted ETFs are not identical and indeed VWO holds more small-cap companies. As a result, VWO's weighted average market cap of $43 billion is lower than IEMG's $53 billion.
In mid-September, Vanguard completed its ten-month transition to an all-cap China A Inclusion FTSE index. As a result, at the end of August 11% of the index was in small-caps previously not part of the prior index VWO tracked. In addition, 5% of the index wa s invested in mainland Chinese companies only available to foreign investors as A-shares through regulated programs.
China is VWO's largest market, with 29% of assets, followed by Taiwan (15%), India (12%), Brazil (9%) and South Africa (8%).
Meanwhile, China represented just 25% of IEMG's assets. This is partially due to the current exclusion of China A shares as MSCI does not incorporate such securities inside its diversified emerging indices, due to perceived lack of accessibility. However, IEMG includes US-listed Chinese companies such as Alibaba (BABA 105 ***) that are not part of VWO.
In addition, MSCI classifies South Korea an emerging market, while FTSE considers the country a developed one. This is meaningful as the country represents IEMG's second largest exposure (15% of assets). Other large exposures include Taiwan (13%), India (9%) and Brazil (7%), all lower than VWO.
Though both ETFs have similar three-year track records, largely unchanged, we think investors need to understand what's inside and not rely on past performance.
Interestingly, iShares MSCI Emerging Markets (EEM 38 Marketweight) gathered only $33 million of new assets in September according to Factset. Though the ETF has a higher expense ratio than IEMG, and more of a large-cap slant, the $31 billion product trades 85 million shares on a daily basis. This is much higher than IEMG or VWO.
Yet the modest inflows for EEM stood in contrast to the $2.1 billion of net outflows for Deutsche X-Trackers MSCI EAFE Hedged Equity (DBEF 26 Marketweight) in September. The currency hedged offering, which was popular in 2015, has declined in value this year and underperformed the unhedged iShares MSCI EAFE (EFA 59 Marketweight).
However, amid concerns about slowing economic prospects in Europe and Japan, investors also pulled $672 million out of EFA last month.
Elsewhere in equity ETFs, domestic products pulled in $8.9 billion last month, the most of any asset category. iShares S&P 500 (IVV Overweight) and Vanguard S&P 500 (VOO Overweight) gathered $1.4 billion and $670 million of new money alone.
Reports on these and more than 1,100 more ETFs ranked by S&P Global Market Intelligence based on a performance, risk and cost attributes can be found on this platform.
TODD ROSENBLUTH - CFRA Director of ETF Research
The Right Stock At The Right Time®
Launch Smart Chart
