What Do VWO, EEM And EWZ Really Hold?

By Dennis Hudachek,

Shutterstock photo

If you own shares in one or more of the largest U.S.-listed emerging markets funds, you might be surprised to learn that some of the largest holdings in the funds have a heavier weighting than you previously thought-around 80 percent more, in some cases.

The funds in question are the Vanguard MSCI Emerging Markets ETF (NYSEArca:VWO), the iShares MSCI Emerging Markets ETF (NYSEArca:EEM) and the iShares MSCI Brazil ETF (NYSEArca:EWZ); the issue of weighting stems from companies that have different classes of stock, such as preferred and common.

A prime example is Petrobras, Brazil's mostly state-owned oil firm, which is held by VWO, EEM and EWZ. MSCI treats different share classes of the energy company distinctly, as do the three ETFs, which are based on MSCI indexes. This often results in investors overlooking some of these different share classes in the fund's holdings and perhaps losing their bearings a bit as far as overestimating diversification.

Frank Nielsen, executive director of equity research at MSCI, said that when his firm creates an index, it analyzes different share classes for eligibility in the index. He added that the weightings are then determined by the percentage of the shares' market cap that floats freely, and not by their trading volumes. He stressed that MSCI's methodology is driven by how clients invest in markets and how they view different share classes.

"From an investor's perspective, you buy the individual shares and not the combined shares, so that's clearly one reason why you don't want to combine the share classes," Nielsen said in a telephone interview.

But regarding company exposure and Petrobras' share classes, Nielsen added:"In some cases, they trade differently, but in terms of company exposure, yes, it's clearly one exposure to Petrobras, and it's very significant in the Brazilian market."

To further complicate things, ETF providers also have the option to use American depositary receipts (ADRs). Therefore, to understand an ETF's full exposure to its top holdings, all share classes and ADRs of the same company should be aggregated in any calculation.


Let's look at VWO first. VWO surpassed EEM as the largest emerging markets ETF in the world on Jan. 18, and is currently the third-largest U.S. ETF, with $45 billion in assets under management. Both ETFs are based on the MSCI Emerging Markets Index, though VWO replicates it more closely than EEM.

As of Dec. 31, Vanguard's website shows the top three holdings as China Mobile, Gazprom and America Movil. In percentage terms, those holdings come out to 1.53 percent, 1.52 percent and 1.46 percent, respectively. The company only discloses holdings quarterly, compared with monthly disclosure from most ETF firms.

But look again at a separate list the Valley Forge, Pa.-based firm keeps of its top 10 holdings at the end of last year, and the picture is different. The website shows VWO's top three holdings as Petrobras ADRs (1.8 percent), Vale ADRs (1.8 percent) and China Mobile (1.5 percent). What's happening here?

VWO actually held multiple share classes of Petrobras and Vale. To be exact, VWO held both the common and preferred shares of Petrobras' ordinary stock-defined as shares traded on the local exchange. It also held the ADR versions of the two Petrobras share classes, which may have been aggregated to arrive at the 1.8 percent weighting given to Petrobras ADRs that was disclosed in its top 10 quarter-end holdings. The fund did the same for its Vale holdings.

But there's more. The issue for investors is that as you dig deeper into the full holdings list and aggregate all the share classes and the ADRs, actual exposure to Petrobras rose to 3.2 percent. The second- and third-heaviest weightings were Samsung and Vale, each with a 2.7 percent weighting.

Vanguard officials acknowledged that their current top 10 list of end-of-quarter holdings is incomplete, and said they are currently working on clarifying the information for investors.

Top Three Holdings and Weightings for VWO as of 12/31/10
Vanguard Website
(full holdings list)
Vanguard Website
quarter-end top ten holdings list)
Actual Weightings
when Share Classes
and ADRs are Aggregated
China Mobile (1.53%) Petrobras ADR (1.8%) Petrobras (3.18%)
Gazprom ADR (1.52%) Vale ADR (1.8%) Samsung (2.68%)
America Movil (1.46%) China Mobile 1.5%) Vale (2.67%)



EEM remains the fourth-largest U.S. ETF, with over $41 billion in assets under management. Its top three holdings as of Jan. 31 shows Samsung (2.34 percent), Petrobras (1.93 percent) and Gazprom (1.73 percent). iShares ETFs tracking MSCI indexes disclose their holdings monthly.

As in the case of VWO, a closer look at the full holdings list yields a different picture. EEM held the Petrobras common and preferred ordinary shares, while in the case of Vale, it held the common and preferred shares in ADR form. Once you do the math, the true exposure to the Petrobras was 3.5 percent and Vale was 2.7 percent.

Top Three Holdings and Weightings for EEM as of 1/31/11
iShares Website
(top monthly holdings list)
Actual Weightings when Share Classes
and ADRs are Aggregated
Samsung (2.34%) Petrobras (3.51%)
Petrobras Preferred (1.93%) Vale (2.74%)
Gazprom (1.73%) Samsung (2.34%)


EWZ is the third-largest ETF in the emerging markets space and the largest single-country ETF, with more than $12 billion in assets. It is based on the MSCI Brail Index. Similar to VWO and EEM, EWZ also holds different share classes of Petrobras and Vale.

As of Jan. 31, EWZ held the ordinary preferred and common shares of Petrobras. For Vale, it held ordinary preferred shares and the ADR version of its common shares. Once all the share classes and ADRs were totaled, the ETF showed a very heavy weighting to Petrobras (20 percent) and Vale (17.7 percent).

Top Three Holdings and Weightings for EWZ as of 1/31/11
iShares Website
(top monthly holdings list)
Actual Weightings when
Share Classes and ADRs are Aggregated
Petrobras Preferred (11.2%) Petrobras (20%)
Vale Preferred (10.2%) Vale (17.7%)
Petrobras Common (8.9%) Itau Unibanco (8.2


The reason iShares includes different share classes is because that's the way MSCI does it, according to Paul Lohrey, CFA, managing director and head of U.S. product management at iShares, a unit of BlackRock.

Regarding the use of ADRs, Lohrey noted that Brazilian local stocks are not in - kindable, whereas ADRs are in-kindable, so using ADRs are sometimes more efficient for purposes of creating ETF shares.

In-kindable refers to the ETF mechanism whereby an authorized participant ( AP ) can buy the underlying shares and exchange them for shares of the ETF with the fund provider. If the underlying shares are not in-kindable, the AP would need to deliver cash to the fund provider, who then goes to the local exchange to purchase the shares.

"We're constantly looking at the trade-off between tracking, tax-efficiency and tradability. iShares tries to strike a balance, and wants a high level of trackability without compromising the liquidity of the ETFs," Lohrey said.

Concluding Thoughts

Overall, cumulative weighting to Petrobras and Vale in all three funds was generally in line with their respective MSCI indexes once all the share classes and ADRs were aggregated.

In other words, the takeaway here is not that fund providers are misleading their investors. It's that ETFs can hold different share classes of the same company, including ADRs, and they aren't disclosed as one aggregated holding.

So, in the spirit of understanding diversification, it's always smart to look at the full holdings to know your true exposure to the fund's top holdings.

Don't forget to check IndexUniverse.com's ETF Data section.

Copyright ® 2011 Index Publications LLC . All Rights Reserved.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing ETFs
Referenced Stocks: AP , EEM , EWZ , VWO

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