A record year of ETF inflows and a blossoming price war that dragged a reluctant iShares into the fray is ending on a decidedly surprising note:The pricey iShares MSCI Emerging Markets Index Fund (NYSEArca:EEM) has matched its much-cheaper rival from Vanguard in asset gathering this year.
In all of 2012, EEM pulled in $10.5 billion-about matching the Vanguard MSCI Emerging Markets ETF (NYSEArca:VWO), which has gathered $10.59 billion this year, according to data compiled by IndexUniverse. EEM may well surpass VWO on 2012's last trading day. VWO is still bigger-$59 billion in assets compared with $48.2 billion for EEM. But it's key to remember that VWO spent much of the past several years catching and surpassing EEM to become the biggest emerging markets ETF in the world.
VWO achieved that milestone largely because it has been anywhere from 2.5 times to 3.5 times less expensive to own every year for the past several years. Even now, VWO costs 0.20 percent a year, or $20 per $10,000 invested compared with 0.67 percent for iShares. It's hard to believe, but EEM will become even pricier in 2013, at 0.69 percent, or $69 for every $10,000 invested.
This truly dramatic reversal of asset flow patterns of the past few years began when Valley Forge, Pa.-based Vanguard announced on Oct. 2 that sometime in 2013, it plans to abandon the MSCI index that its Vanguard MSCI Emerging Markets Fund and EEM both use, and instead organize the fund around a benchmark created by FTSE.
Almost immediately, EEM started pulling in assets in a way it had rarely if ever done, and the word on the Street was that institutional investors who have grown used to benchmarking performance against MSCI's family of indexes might not be too keen on changing indexes.
But the incipient signs of a shift in asset flows between EEM and VWO went largely unnoticed for a number of weeks-in part because just two weeks after Vanguard caused a stir in the world of index investing, iShares itself dropped a bomb of its own when it unveiled plans to launch a family of ultra-cheap "Core" funds.
Core Still Waiting To Score
When iShares unveiled its Core lineup of funds in mid-October, many welcomed the move as a viable way for the San Francisco-based unit of BlackRock to seriously compete for dollars from retail investors, a sizable chunk of the investment world long-dominated by Vanguard.
A fair amount of hopeful talk circulated that the newly launched and much cheaper version of EEM, the iShares Core Emerging Markets ETF (NYSEArca:IEMG), might get a leg up in the asset-gathering game against the likes of Vanguard's VWO and the Schwab Emerging Markets Equity ETF (NYSEArca:SCHE).
After all, the iShares IEMG comes with an annual expense ratio of 0.18 percent-cheaper than VWO's annual cost of 0.20 percent, though 3 basis points more than Schwab's SCHE.
Moreover, iShares even launched a high-quality advertising campaign to begin introducing the cheap funds to the public on TV programs including Sunday morning news programs much watched by viewers who are likely to have an interest and assets to invest.
But the Core funds-some brand new; some repurposed and rebranded; and, like IEMG, all now among the cheapest in their respective classes-haven't really caught on, at least not yet.
A Star Is Reborn
Instead, the iShares Core MSCI Emerging Markets Fund started gathering assets in a big way, and it all began after the Vanguard announcement in early October.
ETF industry sources, including IndexUniverse Director of Research Dave Nadig, have argued that institutional investors aren't going to want to start mixing and matching indexes as they benchmark performance for some of the biggest portfolios in the world.
MSCI, for now, is apparently the go-to benchmark provider in the institutional space, and old habits die hard.
We've been quietly covering this phenomenon as the fall gave way to winter, as the recurring presence of "EEM" in headlines on our weekly ETF flows stories plainly shows.
The trend was rubber-stamped as it became clear that VWO has actually lost assets-not many, but some-since the Vanguard announcement. Indeed, IndexUniverse's "ETF Fund Flows Tool" shows that VWO has bled almost $890 million since Oct. 2, as EEM's dramatic asset-gathering binge reached $8.6 billion.
Where it all ends hinges on how many more institutional investors are out there who think MSCI is the only way to go. It's certainly finite, but one of 2012's most surprising ETF tales may have well continue to play out in 2013.
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