What is the best ETF to invest in?
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Dear Reader,
A recent post of someone questioning rationale of the investor community in ETFs and overpaying in TER (1??) stroke my attention.
The post says:
"Are investors rational? Nope. They are paying BlackRock a cool $100m per year for no reason. EEM vs IEMG: same exposure, same issuer, but EEM charge 0.70% vs 0.09% for IEMG. ??"
The case seems not making any sense at first sight, but yet it does. The exposure is not the same indeed.
In this particular case it is like comparing apples with pears. Both IEMG and EEM are ETFs that provide exposure to emerging markets. The main difference is that IEMG (iShares Core MSCI Emerging Markets ETF) aims to track a broader index ("All cap": large, mid and small) while EEM (iShares MSCI Emerging Markets ETF) tracks only the large and mid caps. The benchmark indexes are equally different: MSCI Emerging Markets IMI Net Index -versus- MSCI Emerging Markets Index. If you want a broad emerging market covered you will choose IEMG but if you want only large and mid caps (more reliable companies in general) then you choose for EEM as ETF. This lower risk is usually at a higher price and a lower performance, which is clearly seen in the post graphic.
The differences are subtle but important. Yes, the top 10 positions are exactly the same, but in different percentages obviously as otherwise there is no room left for the small cap positions in IEMG. Btw the iShares website offers you a nice tool to do comparisons between ETFs (up to 4).
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So the underlying lesson here is: know what you want -and- study what you buy.
The ETF/ETC/ETN landscape is extremely complex and full of traps and shotguns. I wrote about the topic already in a former post long time ago, but in essence the essential terms are related to what exactly you want to track (what benchmark and what is the tracking error?), size and hence liquidity ("AUM"), cost ("TER") and the currency supported (USD, EUR, ...) in combination with all of the above. On top of this you want to have the "best performance" version of a tracker as a function of the issuer. This latter one is a tricky question for most people but the solution and answer is really simple: compare two equal trackers from two issuers based on the longest possible performance in the same currency. I am not so aware of any public (free) tools available so we have to rely on Bloomberg for this.
As an example if you want to have the most performant physical gold tracker on the globe, then compare all candidates known on a period of (at least) 10 years in USD. In this case it is IAU, IGLN, EGLN and 4GLD compared to real gold XAU and compared to some fund of gold diggers. The gold diggers outperform but this is a fund of companies, not what I want. The highest performer is Xetra Gold? in EUR. (2??)
What is the lesson here? Buy a Bloomberg terminal ($50k per year). Or you know someone who has access to it. ?? Wish you all happy ETF hunting or gold digging.
Cheers
Luc