| A new offering is fresh rivalry for similarly positioned mutual funds. |
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| by William Samuel Rocco, 04/13/04 |
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| Diversified emerging markets funds have seen substantial inflows over the past several months. This comes as no surprise. These funds suffered far more-moderate losses than developed-markets-oriented international offerings in 2001 and 2002; they soared an impressive 55% in 2003; and they've earned impressive gains thus far in 2004. Diversified emerging markets funds have returned an average of 20.2% per year over the past three years, in fact, which is better than all other types of international-equity and domestic-equity offerings, except for specialty precious-metals funds. |
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| This outperformance is a welcome change from the struggles of 2000 and other years, of course, but diversified emerging markets funds certainly haven't improved in every respect. These funds remain very pricey, for example. The typical retail offering in the category has an expense ratio of 2.20%. And while the average no-load fund and A share class for individual investors aren't quite that high, they're still awfully expensive at 1.75% and 2.10%, respectively. |
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| Emerging-markets fans who are put off by those painfully high expense ratios, but who are willing to pay trading commissions, should check out the fairly new exchange-traded fund that focuses on the developing world. IShares MSCI Emerging Market Index EEM, which just had its first birthday and tracks the eponymous 26-country index, has an expense ratio of just 0.75%. That's exceptionally low for a diversified emerging markets offering and gives this ETF a marked and ongoing edge. So far, iShares MSCI Emerging Markets Index has had no problems on the performance front, gaining 7 percentage points more than the category norm of 75% over the past 12 months. What's more, this offering, like all ETFs, has an inherent advantage over its rivals when it comes to tax efficiency. |
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| Investors seem to have noticed. This ETF already has nearly $2 billion in assets, which makes it one of the biggest options in its category. |
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| But there are several caveats here. First and foremost is that developing-markets stocks can't maintain their recent, torrid pace forever. A cooling-off period probably isn't too far off, so it's essential to move into this or any other diversified emerging markets offering slowly. |
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| It's also important to note that iShares MSCI Emerging Markets Index, due to its emphasis on the developing world's largest exchanges and stocks, overlaps more with the emerging markets portions of core foreign holdings than many of its rivals do. Indeed, Samsung Electronics, which is its number-one holding and a hefty 8.2% of assets, is the sixth most-popular stock among foreign large-blend offerings--in terms of market value--and most of its other top holdings also are widely and fairly significantly held by foreign large-cap offerings. Thus, this ETF has less diversification value than many of its actively managed emerging-markets rivals. |
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| Moreover, despite its strong start and substantial expense edge, this ETF won't necessarily outperform over the long run. Many actively managed diversified emerging markets funds have beaten the MSCI Emerging Markets Index, this ETF's bogy, over time, by finding good opportunities in the dozen or so developing countries that aren't in the index, by discovering lots of smaller-cap winners, or by simply making superior large-cap picks. Indeed, Vanguard Emerging Markets Index VEIEX, which has tracked customized versions of the MSCI Emerging Markets Index since opening in early 1994, has earned fairly average returns and suffered fairly average volatility relative to other diversified emerging markets funds over time. |
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| Meanwhile, if you do want an index-tracker in this category, it's hard to argue against the Vanguard fund. That offering's customized benchmark is now quite similar to the MSCI Emerging Markets Index, and that fund's expense ratio is even lower than this ETF's. |
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| In short, iShares MSCI Emerging Markets Index is a welcome, low-cost addition to the pricey diversified emerging markets category, and it should be of particular interest to investors who are drawn to the tax efficiency, trading flexibility, and other attributes of ETFs. It's not the best option, or even the best low-cost choice, for all emerging markets fans, though. |
Refresh June 08, 2026 10:06 PM ET
