An Emerging Markets Bargain Basket

Rock-bottom pricing in the exchange traded funds universe has long since traversed the emerging markets space. These days, investors can consider a number of low-fee products to gain exposure to developing economies, including the increasingly popular iShares Core MSCI Emerging Markets ETF IEMG.

Just over five years old, IEMG was launched as a low-cost alternative to the iShares MSCI Emerging Markets ETF EEM, a favorite of professional investors. Today, it's home to $40.6 billion in assets under management, making it the second-largest emerging markets ETF and proving that plenty of advisors and institutional investors like low-fee funds, too. IEMG has also outpaced the category average since coming to market.

“From its inception in October 2012 through October 2017, the fund outpaced the diversified emerging-markets Morningstar Category average by 55 basis points annualized, with comparable volatility,” Morningstar said in a Friday note. “This is a very risky category that has consistently exhibited much higher volatility and downside risk than foreign developed-markets stocks.” 

Big And Cheap

IEMG's annual fee of 0.14 percent, the equivalent of $14 on a $10,000 investment, ties it with the Vanguard FTSE Emerging Markets ETF VWO for the honor of being the second-cheapest emerging markets ETF. Additional cost savings can be realized with IEMG, as the ETF is part of Fidelity's commission-free ETF platform.

IEMG holds about 1,880 stocks, or more than double the amount found in EEM and the MSCI Emerging Markets Index. IEMG tracks the MSCI Emerging Markets Investable Market Index, an offshoot of the popular developing markets benchmark.

The low-fee iShares ETF is up 32.7 percent year-to-date, an advantage of 550 basis points over its Vanguard rival. South Korea is a big reason why. The MSCI Korea 25/50 Index is up 41.5 percent this year. MSCI, the index provider for IEMG's benchmark, classifies South Korea as an emerging market. FTSE Russel, VWO's index provider, does not.

Diversification Benefits

One of the primary reasons investors embrace emerging markets assets, particularly ETFs, is to add some diversification to portfolios that are often heavy on domestic stocks. IEMG helps with these benefits.

“The best reason to own emerging markets stocks is for the diversification they provide,” according to Morningstar. They may also offer higher expected returns than developed markets stocks when they are trading at lower valuations, as they are now. Over the trailing 10 years through October 2017, the MSCI Emerging Markets and MSCI USA Investable Market Indexes were only 0.81 percent correlated.

IEMG has added $15.1 billion in new assets this year. Only three ETFs have seen larger year-to-date inflows.

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