While international markets are a popular place to be for exchange traded funds (ETFs), analyzing them can be trickier than analyzing those that stick to domestic securities, reports David Hoffman at Investment News.

The iShares MSCI Emerging Markets Index (EEM) is cited as an example, because of its tracking error. As of last Wednesday, the fund had posted a one-year return of 45.7%. That’s not bad, but the one-year return of its benchmark was 50.95%, according to Morningstar.

What gives? There are two reasons: 1) iShares doesn’t own the entire index, but rather, samples a portion of it. 2) Some countries, such as Brazil and Malaysia, don’t allow for "in-kind" redemptions, which is key to the whole process of many ETFs. This leaves the iShares fund underweighted in those countries.

The Vanguard Emerging Markets ETF (VWO) doesn’t have those issues, because it’s a share class of a Vanguard mutual fund. It doesn’t rely on share creation and redemption to do business with countries that don’t allow it.

As the international market heats up and the number of ETFs covering them grows, there could be more issues cropping up that keep these ETFs from being all they could be. These issues are worth keeping an eye on.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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