Emerging Markets Exposure on the Cheap

This year, investors have been favoring low-cost, international equity exchange traded funds, a theme that is not limited to developed markets funds. With emerging markets stocks also soaring, cost-conscious investors are also scampering to ETFs, such as the iShares Core MSCI Emerging Markets ETF (NYSEArca: IEMG).

IEMG is the low-cost alternative to the iShares MSCI Emerging Markets ETF (NYSEArca: EEM). Another interesting fact about IEMG is that the ETF does not see outflows. As in ever. Since coming to market in mid-October 2012, IEMG has not had a single day of net outflows. As of Nov. 2, IEMG was home to $40.6 billion in assets under management, making it the second-largest emerging markets ETF behind the Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO).

“From its inception in October 2012 through October 2017, the fund outpaced the diversified emerging-markets Morningstar Category average by 55 basis points annualized, with comparable volatility,” said Morningstar in a recent note. “This is a very risky category that has consistently exhibited much higher volatility and downside risk than foreign developed-markets stocks. Unlike some of its active peers, this fund does not take any steps to mitigate the impact of market downturns. However, its smaller-than-average cash drag and cost advantage should give the fund an edge over the long run.”

Year-to-date, investors have added $15.1 billion to IEMG, good for the best inflows total among all emerging markets ETFs and the fourth-best total among all US-listed ETFs. In every quarter this year, IEMG has been among the top asset-gathering ETFs.

In an extended bull run, U.S. markets have rallied to record highs but they are now trading at lofty valuations relative to historical averages. On the other hand, international markets that have mostly lagged behind the outperformance in U.S. equities, prior to this year, remain attractively priced.