On Oct. 2, Vanguard announced it would be shifting the
underlying index on its popular Vanguard MSCI Emerging Markets ETF
(NYSEArca:VWO) from its current MSCI index to the FTSE Emerging
Index during the first half of 2013.
BlackRock Chief Executive Laurence Fink, quoted by Reuters, told
analysts in a conference call that it appears funds had been
flowing into his firm's iShares MSCI Emerging Markets Index Fund
(NYSEArca:EEM)-and not into VWO-as a result of Vanguard's planned
index change.
But did they?
IndexUniverse monitors daily ETF flows-you can check out our
online tool here-so it's an easy claim to check.
%20flows%20over%20the%20past%20three%20weeks%20have%20indeed%20eclipsed%20VWO%E2%80%99s%20flows,%20but%20there%20are%20two%20notable%20points%20here.%3C/p%3E%0A%3Cp%20class='MsoNormal'%3E%3Co:p%3E%3C/o:p%3E%3C/p%3E%0A%3Cp%20class='MsoNormal'%3EFirst,%20the%20$1%20billion-plus%20that%20has%20gone%20into%20EEM%20since%20the%20Vanguard%20announcement%20didn%E2%80%99t%20start%20flowing%20until%20Oct.%2015%E2%80%94a%20good%20two%20weeks%20after%20the%20Vanguard%20announcement.%3Co:p%3E%3C/o:p%3E%3C/p%3E%0A%3Cp%20class='MsoNormal'%3EIt%E2%80%99s%20possible%20that%20the%20money%20did%20indeed%20come%20from%20typical%20Vanguard%20investors%20who%20were%20sitting%20on%20extra%20cash%20and,%20after%20doing%20two%20weeks%20of%20due%20diligence,%20decided%20that%20it%20made%20sense%20to%20begin%20switching%20over%20to%20EEM.%3Co:p%3E%3C/o:p%3E%3C/p%3E%0A%3Cp%20class='MsoNormal'%3EBut%20then%20again,%20it%E2%80%99s%20also%20possible%20that%20a%20few%20institutional%20investors%20decided%20it%20was%20a%20good%20time%20to%20up%20their%20emerging%20markets%20allocations.%3Co:p%3E%3C/o:p%3E%3C/p%3E%0A%3Cp%20class='MsoNormal'%3E%3Co:p%3E%20%3C/o:p%3E%3C/p%3E%0A%3Cp%20class='MsoNormal'%3ECrucially,%20money%20hasn%E2%80%99t%20actually%20flowed%20%3Cem%3Eout%3C/em%3E%20of%20VWO.%20In%20fact,%20about%20$42%20million%20has%20flowed%20into%20it%20since%20Vanguard%20announced%20the%20index%20would%20be%20switching%20next%20year.%20%3Co:p%3E%3C/o:p%3E%3C/p%3E%0A%3Cp%20class='MsoNormal'%3EBroadly,%20both%20funds%E2%80%99%20assets%20under%20management%20(AUM)%20have%20remained%20relatively%20constant%20aside%20from%20EEM%E2%80%99s%20slight%20bump%20last%20week.%3C/p%3E%0A%3Cp%20class='MsoNormal'%3E%C2%A0%3C/p%3E%0A%3Chr%20class='system-pagebreak'%20/%3E%0A%3Cp%3E%C2%A0%3C/p%3E%0A%3Cp%3E%3Cimg%20alt='AUM:EEM%20vs.%20VWO'%20height='291'%20width='484'%20src=)
It makes sense, of course. Nothing has actually happened yet. If
people were truly going to leave VWO for EEM over the exposure, I
would think that they'd at least enjoy the lower expense ratio as
long as they could before switching over.
In addition, capital gains taxes-especially for long-term
emerging markets investors-definitely hurt. VWO is up over 96
percent since its inception in 2005. If I were holding a large VWO
position in a taxable account, I would certainly be hesitant to
take that hit.
Despite Mr. Fink's conjectures, I would bet that the vast
majority of VWO holders stay put. As Dave Nadig pointed out on Oct.
2, Vanguard was the most favorably viewed ETF issuer on the market
in a Cogent study done in March 2012.
So, will some people who want to remain tied to MSCI switch
over? Sure, it's possible. But it would be fallacious to assume
everyone will.
Moreover, unless they're frequent traders or institutional
investors who are planning to trade immediately, I would bet that
the money flows into iShares' new emerging markets fund, the
iShares Core MSCI Emerging Markets ETF (NYSEArca:IEMG), rather than
EEM.
It has a lower expense ratio than EEM by nearly 50 basis points
and has already attracted over $80 million since launching
yesterday, according to the iShares website.
It's not a trader's fund yet-IEMG is currently trading with a
0.12 percent bid/ask spread, which is less than ideal-but I'd
expect that to come down as the fund picks up assets.
At the time this article was written, the author had a position
in VWO. Contact Carolyn Hill at chill@indexuniverse.com.
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