BlackRock's emerging-markets ETF outpaced Vanguard's in June

For the first time in eight months, iShares MSCI Emerging Markets Index Fund saw greater inflows than its only rival

Jul 7, 2010 @ 2:15 pm

By Jessica Toonkel Marquez

BlackRock Inc.'s emerging-markets ETF saw greater inflows than its rival offering from The Vanguard Group Inc. last month, marking the first time the fund has beaten its much bigger rival since October.

BlackRock Inc.'s iShares MSCI Emerging Markets Index Fund Ticker:(EEM) had net inflows of $1.7 billion in June, compared with $787.7 million for Vanguard's Emerging Markets ETF Ticker:(VWO).

Industry experts and advisers have long compared the two because they are the only ETFs that track the MSCI Emerging Markets Index.

Over the past few months, iShares has made changes to many of its funds, including the emerging-markets fund, to increase or decrease exposure to certain areas of the market and re-balance, said Noel Archard, managing director at the iShares unit of BlackRock. “This is an ongoing process,” he said.

That active management may have spurred the recent inflows, said David Nadig, director of research at IndexUniverse.com.

“iShares is getting paid to be an optimization shop and not just replicate the index,” said Dave Nadig, director of research at IndexUniverse.com. “They will hold a representative sampling of stocks but when you are dealing with something like emerging markets it's inherently volatile.”

Indeed since the iShares fund features more active management, it has a greater tracking error than Vanguard's offering. It also has higher expenses than the Vanguard ETF — 0.72% compared to 0.27%.

Despite the June numbers, Mr. Nadig and other experts believe the $24.7 billion Vanguard fund will continue to take assets away from the $35 billion iShares fund. Despite last month, so far this year the Vanguard fund has taken in $6.8 billion, compared to $1.6 billion for the iShares fund.

“iShares used to have the liquidity advantage,” said Matt Hougan, publisher of IndexUniverse.com, noting that iShares came out with its fund in 2003, two years before Vanguard. “I think the June flows are a one-off event and next month we will see the Vanguard fund outpace the iShares fund again.”

iShares needs to work more at explaining to investors why its expenses are higher, said Scott Burns, an analyst at Morningstar.

“The fact is, 72 basis points isn't the whole expense story,” Mr. Burns said. “They are generating trading revenue that is getting shared with investors.”

Mr. Archer said he and his team is getting that message across to advisers.

"If you were buying a traditional mutual fund you might look just at the expense ratio, but for an ETF you need to take into account total cost," he said.

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