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New iShares Emerging Market and World ETFs

June 25th, 2009 · 11 Comments

iShares Canada is finally introducing two new ETFs that provide exposure to foreign stocks: iShares CDN Emerging Markets ETF (XEM) and iShares CDN MSCI World ETF (XWD). Both ETFs started trading on the Toronto Stock Exchange yesterday.

XEM simply holds the iShares MSCI Emerging Markets ETF (EEM), which in turn tracks the MSCI Emerging Markets Index. The total MER for XEM is 0.82%, which includes EEM’s MER of 0.72%. XEM has plenty of Canadian competition now: the Claymore Emerging Markets ETF (CWO, MER of 0.65%) and the soon-to-be launched BMO Emerging Markets ETF (MER of 0.535%). The Vanguard Emerging Markets ETF (VWO) remains the cheapest way to get exposure to emerging markets — the MER is 0.25% and there is no extra performance drag due to withholding taxes.

XWD tracks the MSCI World Index, which despite its name excludes emerging markets. It tracks stocks in the developed markets of Canada, United States and the traditional EAFE markets. The MER of the ETF is 0.45%. XWD is likely to be uninteresting for investors because, for one thing, it holds Canadian stocks. It is also unattractive from a fee perspective: VTI plus VEA has a blended MER of less than one-quarter the cost of XWD.

PS: If you switched to RBC Direct Investing last fall to take advantage of the 1% bonus offer, check your accounts. The bonuses are being paid out this week.

PPS: Don’t forget to participate in the Thrill of a Lifetime giveaway. The odds are still attractive and the contest closes in less than 2 days.

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11 responses so far ↓

  • 1 Henry // Jun 25, 2009 at 10:30 am

    I do not understand why XWD tracks MSCI World Index. With US iShares, there is only ACWI and ACWX, which tracks MSCI All Country World Index and MSCI All Country World Index ex US respectively. MSCI All Country World Index includes emerging market, but excludes the frontier markets. It seems that it would be easier for XWD to hold ACWI directly than holding multiple ETFs to construct MSCI World Index.

    Even though, EEM has a MER of .72%, there seems to be very little tracking error in comparison with VWO by comparing the two on Google Finance. I don’t know how iShares was able to accomplish that even with securities lending.

  • 2 Sampson // Jun 25, 2009 at 11:35 am

    Hmm, maybe I’ve read the prospectus wrong, but basically they are charging 0.07% to allow you to buy EEM in CAD dollars. This is in addition to the withholding tax mentioned, and currency risk.

    The withholding tax alone is probably enough to keep me away from this.

  • 3 Chris // Jun 25, 2009 at 11:35 am

    XEM looks to be the first non-hedged emerging markets ETF denominated in Canadian dollars. Too bad the MER is so high. Isn’t a non-hedged ETF supposed to be less expensive?

  • 4 Canadian Capitalist // Jun 25, 2009 at 11:44 am

    Henry: Interesting observation. I went researching the tracking error of EEM and VWO. EEM is very interesting. It has positive tracking errors over 1, 3 and 5 years and since inception! VWO on the other hand closely tracks the index but the tracking error is negative.

    EEM had a positive tracking error of 3.62% over the one year period to March 31, 2009; 0.66% over 5 years and 0.73% since inception. These are huge differences and makes me wonder if I was wrong in picking VWO over EEM. Any thoughts on why this might be so?

    It makes no sense to me that iShares or any other vendors would offer a foreign ETF to Canadians that includes Canada. Why can’t these guys offer a one-stop ETF that has US, EAFE and emerging markets for a reasonable MER?

  • 5 Henry // Jun 25, 2009 at 4:35 pm

    According Vanguard’s website, VWO holds 791 securities and MSCI Emerging Market Index has 733 securities. According to iShares, EEM has 338 securities. Therefore, VWO is trying to be exactly like the index, while EEM is a passively managed to mimic the index.

    I am just wondering if EEM outperformed the index by luck or skill.

  • 6 larry macdonald // Jun 25, 2009 at 5:02 pm

    1. Did EEM outperform its index because of security lending? I believe the fees are higher for lending emerging-market stocks.
    2. iShares states in their press release that their two new ETFs avoid the U.S. estate tax that would be applied on one’s death if they owned the U.S. ETFs. One might suppose this would be a reason to invest in them. But the US estate tax currently applies only if an investor has over $3.5 million in world assets. Even if they were above the threshold, there still are strategies to avoid the tax, e.g. incorporating etc.

  • 7 John // Jun 26, 2009 at 10:18 am

    Thanks for the reminder on the 1% bonus, I had forgot to check and its a good thing I did cuz they missed paying into one of my accts.

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  • 11 JW // Nov 3, 2009 at 12:57 am

    Hi CC:

    Now that all ZEM, XEM, and CWO are widely available, I was wondering if you might do a cross-comparison of their performance and costs. I know you favour VWO, but I’m interesting in the Canadian-operated funds, especially ZEM and CWO.

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