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Why is iShares able to charge more for EEM in comparison to VWO (a very similar ETF)?

Investors/Traders are mostly institutional and in general, these entities have more insight (though simple investors can usually beat the market) and can clearly see that EEM's expense ratio 0.69% is a more against their bottom line than the similar VWO (0.14%).

As a common micro investor, I want to own an ETF with high liquidity and low expense ratio. Why don't these investors switch to VWO or any other lower priced ETF?

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This is a product of a few factors:

EEM is very liquid, while it has just under half the assets under management of VWO (35b vs 65b) it has a daily volume nearly 5x higher than VWO (2.5bn vs ~500m) and very tight spreads, so if you are looking to enter and exit big positions frequently at good prices it is much easier to do so. It also has a very deep and active options market.

EEM has a small number of holdings vs VWO (888 vs 3771), so in liquidity squeezes it should hold its conversion in a more stable way than VWO, where shares in some of VWO's fringe stocks may become hard to buy/have very wide spreads and the redemption mechanism has a higher chance of breaking down. Can be an important consideration if you want to be confident you can consistently move out a lot of money fast.

Liquidity begets liquidity: heavily traded products have their own benefits as they attract all the other big traders and become the only game in town for certain types of trade (very large/fast in particular), and people are happy to pay (an often quite large) additional premium for this. You can also see this effect on things like betting exchanges, where someone like Betfair can charge ~5% of winnings vs someone like Smarkets 2%, just because if you're a very big player you can't get the volume of money you want down on the smaller, cheaper exchange, and people are happy to pay a lot more for this liquidity.

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+25

Answer from Phillip is correct. I want to add that there are total 807 million shares outstanding fr EEM and turn over is 16% or Average Volume is 66 millions shares per day.

So each EEM is changing hand every 12 days on an average. And same is not true for VWO . For VWO it is 1.51B/14.15M ~=100+ days.

2

Sorry I misread the question, updated my answers below.

Benchmarks

EEM(iShares): follows MSCI index.

VWO (Vangaurd): follows FTSE EM all cap index

A comparison table for easy reference:

https://etfdb.com/tool/etf-comparison/EEM-VWO/

EEM was one of the earliest EM-focused ETF and debuted in 2003 with its reasonably attractive fees then. However, lower costs player started to enter the market, building AUM size and consequently lowering expense ratios.

However, EEM remained attractive due to:

  1. Very liquid (tight bid-ask). $60m daily trading volume or 4x of VWO. This is despite EEM having half the share outstanding versus VWO.
  2. Concentrated (high Beta). EEM is also more concentrated with top 10 holdings at 24% versus VWO's 20.4%. Easier for investors to make focused bet rather than a large diversified basket.
  3. Represents EM risk/rewards despite smaller AUM and less holdings ($33b vs. VWO' $63b). It helps liquidity too as it focuses mainly mid to large caps whereas VWO is all caps because its so big and needs to buy across more stock holdings to spread out weightage).
  4. MSCI more widely followed index, also more balanced. For example MSCI EM has South Korea, but VWO does not. Many derivatives are hence built upon EEM which further supports people's willingness to buy and hence the expense ratio.

Over time, Blackrock/iShares acknowledged that it is losing AUM and fees to competitors and came up with an alternative, the IEMG etf which sports a 0.14% expense fee. Its now about $61b, similar to VWO.

Theres a recent Bloomberg article that talks about EEM in general. Even EEM has a much higher expense ratio than other iShares ETFs of significantly larger size.

Lastly, people should note that because EEM tracks MSCI EM, its weightage to China will increase further as MSCI is adding China A-shares exposure.

Conclusion: EEM has higher expense ratio by legacy. However because of its popularity, it maintains the high ratio (continues to milk it) and introduced a more cost effective alternative to maintain its hold on AUM (and fees, albeit much lower than EEM), away from low cost providers like VWO. Over time, investors are likely to continue to gravitate towards VWO/IEMG etfs and EEM would last so as long there are investors who would like a more nimble option with derivatives.

  • so, expense on etf is not same as profit ? I think expense is in addition to the cost ? – Raj May 12 at 12:58
  • Sorry Raj, not sure what you mean. I updated my answer. ETF expense is cost on investors, but fees/ profit to ETF providers. The costs would help cover operational costs of running the ETFs – Thinkerer May 12 at 14:31
  • I thought if the expense charged is equal to the profit of the etf-Issure. But I think you clarified that expense is equal to (cost+profit) to etf-issuer. But then I wonder how can itot have both (cost+profit )=0.03% – Raj May 12 at 17:48
  • Oh right. So say you invest ETF, and pay 0.03%. So on $1,000, that is $0.3. But to the fund with $60b total AUM collected, thats $18m in annual fees. thats just for one fund. So if the ETF company only has 1 fund, that $18m will be the revenues. Maybe leasing the office and hiring people will cost perhaps an arbitrary $10m per year, so firm earns $8m in profit every year assuming no change. – Thinkerer May 18 at 16:28

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