Archives for February 2010

One of the hottest asset classes in 2009 by far was Emerging Markets, which includes stocks from developing markets like China, Brazil, Korea, Taiwan, India, and South Africa. Two of the most popular ETFs in this category are the iShares MSCI Emerging Markets Index (EEM) and the Vanguard Emerging Markets ETF (VWO).

Which one should you choose?

Similarities. Both are primarily passively-managed and based on the MSCI Emerging Markets Index. EEM has been around longer but both currently have similar levels of assets, with $40B for EEM and $34B for VWO.

Differences. EEM is less expensive than most other actively-managed Emerging Markets mutual funds at a 0.72% annual expense ratio, but Vanguard is significantly cheaper still at 0.27%. EEM has a much higher average trading volume, as it has a higher popularity amongst institutional investors and active traders.

While they track the same index, both ETFs have their own sampling methods to replicate that index. EEM holds 439 stocks with an average market cap of $23.1 million, while VWO holds 816 stocks with an average market cap of $17.6 million. Unfortunately, Morningstar chose the MSCI EAFA Index as their benchmark for statistical comparison, so it’s hard to see exactly historically which one has been following the index more closely.

Performance-wise, iShares’ EEM has recently been lagging behind Vanguard, as was pointed out in this IndexUniverse post. In 2009, EEM rose 68.8% but VWO gained 76.3%, nearly 8 percentage points more.

This has led to a significant outflow of funds recently from EEM into VWO:

However, if we look back to 2008 EEM dropped 48.9% while VWO dropped 52.5%. VWO isn’t old enough to compare 5- or 10-year historical returns, but if you compare 3-year annualized trailing returns VWO only beats EEM slightly at 2.69% vs. 2.60%. That’s actually surprising given the 45 basis point expense edge for VWO.

Conclusion. Due to their differences, either EEM or VWO may outperform each other in the short run. However, historically the significantly lower expense ratio of VWO has won out, and I would expect it continue to do so in the long run. VWO also holds more stocks and thus would seem to track the MSCI index more closely, while EEM offers more liquidity if you’re trading high amounts of shares at once.

Disclosure: I am or will be invested in VWO or the mutual fund equivalent (VEIEX). The reason I started this research is because I am currently trying to figure out how to switch to an ETF since the Vanguard fund VEIEX is both more expensive at 0.39% annually and has both a purchase fee of 0.50% and a redemption fee of 0.25%. Ouch! You can compare the total ongoing costs of VWO vs. VEIEX easily at this Vanguard calculator.

In addition to their new $7.95 per trade price structure, Fidelity is also waiving commissions completely for 25 iShares ETFs. This appears to be a partnership where iShares partially compensates Fidelity themselves for promoting their ETFs.

Fidelity receives compensation from the ETF sponsor and/or its affiliates in connection with a marketing program that includes promotion of iShares ETFs and certain commission waivers. Additional information about the sources, amounts, and terms of compensation is described in the ETF’s prospectus and related documents. Fidelity may add or waive commissions on ETFs without prior notice.

Technically, you could make a relatively complete passive portfolio consisting entirely of these iShares ETFs. For example, if you wanted a stock portfolio encompassing the entire world in proportion to their current market capitalization share, you could go with

45% IWV (Broad United States)
40% EFA (Broad Developed Europe & Pacific)
15% EEM (Emerging Markets)

Since these ETFs have pretty good trading volume, the bid-ask spreads should also be reasonably small. For the bond portion, one possibility would be

50% AGG (Broad, Investment Grade Taxable US Bonds)
50% TIP (US Treasury Inflation-Protected Bonds)

assuming you had room in a tax-advantaged account like an IRA. Not a recommendation, just what I might buy for myself.

US Equity
iShares Russell 1000 Growth (IWF)
iShares Russell 1000 (IWB)
iShares Russell 1000 Value (IWD)
iShares Russell 2000 Growth (IWO)
iShares Russell 2000 (IWM)
iShares Russell 2000 Value (IWN)
iShares Russell 3000 (IWV)
iShares S&P 500 Growth (IVW)
iShares S&P 500 (IVV)
iShares S&P 500 Value (IVE)
iShares S&P Mid Cap 400 Growth (IJK)
iShares S&P Mid Cap 400 (IJH)
iShares S&P Mid Cap 400 Value (IJJ)
iShares S&P Small Cap 600 Growth (IJT)
iShares S&P Small Cap 600 (IJR)
iShares S&P Small Cap 600 Value (IJS)

Dow Jones U.S. Real Estate (IYR)

International Equity
iShares MSCI ACWI (ACWI)
iShares MSCI EAFE
iShares MSCI EAFE Small Cap (SCZ)
iShares MSCI Emerging Markets

Bonds
iShares Core Total U.S. Bond Market ETF
iShares Barclays TIPS Bond ETF
iBoxx $ Investment Grade Corporate (LQD)
JP Morgan USD Emerging Markets (EMB)
S&P National AMT-Free Municipal (MUB)

Fidelity announced today that starting February 3rd, 2010, the price of all online equity trades through their brokerage would cost $7.95, with no limit on the number of shares. Previously, the commissions ranged from $8 to $19.95 per trade depending on asset value and trading volume. This is great news for my Self-Employed 401k at Fidelity. Phone and broker-assisted trades cost a little more:

Customers placing trades through Fidelity’s Automated Service Telephone (FAST) will pay an additional $5 per trade ($12.95 total), and those placing trades through a representative will pay an additional $25 ($32.95 total) per trade.

This move makes Fidelity more competitive with the other discount brokers out there, for example I have an account with OptionsHouse which charges only $2.95 per trade.

They also announced commission-free trades for 25 iShares ETFs, which seems like a direct response to Schwab’s commission-free ETFs.