Will long term EEM investors please stand up?

By: ispeculatornew
Date posted: 09.28.2010 (5:00 am) | Write a Comment  (5 Comments)

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I have written about this in the past but I always find it interesting to go back and see how things evolve. Just to refresh your memory, EEM, one of the oldest ETF’s around was created by Ishares in on April 11th 2003 in one of the first ETF creations. The interesting part about this specific one was that it was the first ever ETF that gave exposure to broad emerging markets as it tracks the MSCI Emerging Markets index.

EEM takes over the market

Thus, there was no surprise to see the ETF pick up and capture virtually all of that market. Over time, more specialized ETF’s that cover either individual countries or even sub-sectors of those countries started to appear.But to most long term investors, trading one broad name is more efficient in order to diminish costs. Anyway, it is difficult to determine which country’s market will perform best over a few decades.

EEM had the first mover advantage. In ETF’s, as in most other financial products, being the first to offer a product is a huge advantage because it gives you the dominant market share. From that point on, unless you screw up or competitors come up with a significantly better offering, you can generally keep a significant portion of the business. At least that is the theory, would it hold true this time?

VWO arrives in town

Vanguard, now one of the biggest ETF players on US markets decided to offer direct competition to Ishares on EEM in 2005 as it launched VWO, a fund that tracks exactly the same index. How would they get some market share? The most logical thing to do was to offer lower fees for unit holders which is exactly what they did. They charged a 0.27% fee, less than half what Ishares was charging for EEM (0.72%). I am guessing that they expected Ishares to diminish their fees a little but remain lower or at least as low. That did not end up happening…

What is surprising is that Ishares has been able to maintain such high fees on the fund. There is no doubt that they could afford to diminish them but why do so if you are keeping high market share anyway? Now, VWO has been gaining assets a lot more quickly than EEM and thus gaining market share. Just take a look at numbers as of now as well as from previous dates where we presented the data:

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That being said, the differences between the two are still significant. So I decided to look into why investors were still hanging on to EEM.

EEM charges much higher fees so long term investors would be paying higher fees
EEM has almost 4 times as much daily volume as VWO which can certainly be apealing to day traders, high frequency funds, etc. These companies will not end up holding much inventory over time so they would probably trade both but prefer the one with more volume
-As you can see in the above charts, the returns are very similar. There will be differences because they use different strategies to match the index return. Over time however, they should converge and both match the MSCI Emerging Markets index. And in any case, VWO is much closer to returning the index’s return as it holds almost twice as many names as EEM does.

So my main question is not why someone would buy EEM because it could be for a quick trade. Rather, I would like to hear from EEM shareholders. Why do you hold the stock even though you are paying more? It is because:

Ishares is a more “reliable” issuer? In the days where Vanguard was a small, lesser known player I could see this being as an argument but now that Vanguard is one of the big names in the space, I don’t consider this to be a valid reason.

You do not know about VWO? This might be the case for many of you either because you did not find it, did not do resaearch or your advisor/planner has a good relationship with Ishares which helps him recommend Ishares products above all others?

You just like to throw money out? If that is the case (and it’s really the only one I can see)… please switch to VWO and send me the money you saved by mail or Paypal. I’ll be glad to send you our premium newsletter in return:)

I would love to hear from any of you

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5 Comments

  1. Comment by John — September 28, 2010 @ 8:54 am

    I still own EEM. I know that’s not rational for you.

    I should eventually sell EEM for VWO (2010-2011). However I bought this a while ago, at its peak. Want to wait until it goes back at my buy level 😉

  2. Comment by IS — September 29, 2010 @ 7:22 pm

    I just hope you don’t have too much:) If you don’t, the difference won’t be significant.

  3. […] catching up on EEM: I’ve discussed this quite a few times, it puzzled me how EEM was able to keep the lead. Yes, it’s the bigger name, but it charges […]

  4. Comment by Arnold — December 29, 2010 @ 12:51 am

    I use EEM because of the tighter option spreads and volume. I use EEM in a covered call and as needed hedging put debit spreads. I would switch to VWO if its option become as liquid.

  5. Comment by IS — December 29, 2010 @ 6:05 pm

    @Arnold – Thanks a lot for bringing that up, very good and valid point! Option traders would be much better off trading EEM for now.

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