Feel like throwing money out of the window?

By: ispeculatornew
Date posted: 09.23.2009 (5:00 am) | Write a Comment  (1 Comment)

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It is quite interesting to see funds flow in and out of ETF’s. However, it is often difficult to compare ETF’s as they often do not target exactly the same returns. But in some cases, several ETF’s track the same index but with very different charges. Why would you invest in a fund that charges over twice the fees if it targets (and pretty much meets) the same returns before fees. A very interesting case is taking place in the emerging market ETF’s.

One on hand, there is the very known EEM, managed by Ishares, that charges .72% of fees, which is high but seems reasonable considering it invests in many different illiquid markets. EEM has $31.7 Bn under management, a very impressive amount. But then consider Vanguard’s VWO fund which tracks the same index, the MSCI Emerging Markets Index. It charges .27% of fees, not even half of the fees charged by Ishares. Since it is not as known, VWO still has fewer assets under management, at $22.7 Bn.

The question of course is why someone would choose to invest in EEM when in fact you could pay fewer fees for the same return? One reason could be that you think one manager will not be able to achieve the promised return. In this case, both companies have a very solid reputation, both funds have a good history and you can look at this graph, there is in fact almost no difference between the return of the two funds.

You can take a look at the differences between the two here:

eem_vwo
As you can see, they are pretty much identical so paying 0.45% more of fees does not sound like a good deal. There are rumours that Ishares will reduce the fees it charges later this year on EEM but for now, with as the largest emerging markets fund, it has little incentive to actually do so. If two funds offer the same return but one has a better reputation, strangely, many investors fly to that one.

Of course, I would not switch based simply on fees to a new and unproved company. But Vanguard is far from that and I will be the first one to buy VWO the next time I buy emerging markets ETF’s. I have stated numerous times that I am a fan of Ishares, but not fan enough to throw money out of my window… Of course, if you would like to do so, be my guest, I’ll be sitting outside to collect:)

eem_vwo2

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1 Comment

  1. […] Intelligent Speculator is asking: feeling like throwing money out the window? […]

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