It has been more than 20 years since the first U.S.-listed exchange traded started trading, but a familiar conundrum facing ETF investors remains. Scores of ETFs have similar-sounding names that imply the funds are carbon copies of each other when that is not the case.
“ETFs own baskets of securities that are designed to track the performance of a certain market index. Some of these funds might seem similar—because they focus on the same market area or have similar-sounding names—but the indexes they follow may be quite different, meaning the funds often produce divergent results,” reports Michael Pollock for the Wall Street Journal.
As the Journal points out, one of the most familiar examples of two ETFs that have similar names but deliver diverging returns is the comparison of the Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO), which tracks the FTSE Emerging Index, and the iShares MSCI Emerging Markets ETF (NYSEArca: EEM), which follows the MSCI Emerging Markets Index. [Emerging Markets ETF Ideas]
Until late 2012, VWO and EEM both tracked the MSCI Emerging Markets Index, but by mid-2013, VWO was using the FTSE Emerging Markets Index as its benchmark. FTSE classifies South Korea as a developed market while rival MSCI still views Asia’s fourth-largest economy as a developing market. Translation: EEM holds South Korean stocks, VWO does not.
While VWO and EEM have deviated much from each other this year, longer periods show a significant difference between the two ETFs. For example, VWO has traded slightly higher over the past two years while EEM is off half a percent over that period. [Emerging Markets ETFs Show Leadership Traits]
“Indeed, Morningstar Inc. classifies the iShares fund’s portfolio as 31% developed markets and 69% emerging markets. The research firm puts the Vanguard fund’s holdings at 17% developed and 83% emerging,” according to the Journal.