iShares Core MSCI EM IMI ETF USD Acc GBP (LSE:EMIM) - ETF price


ETF Report

iShares Core MSCI EM IMI UCITS ETF USD (Acc) (GBP) EMIM

AnalystReport

PortfolioConstruction

The MSCI Emerging Markets Investable Market Index is a free-float market-cap-weighted index covering large- and mid-cap companies in 24 emerging markets. With 2,711 constituents, the index covers approximately 99% of the free float-adjusted market capitalisation in each country. The index is reviewed quarterly and rebalanced semiannually. Components must meet minimum criteria for liquidity, minimum free-float-adjusted market capitalisation, and foreign ownership, as well as a waiting period for newly listed stocks. As of 1 Dec 2015, MSCI included foreign-listed companies, otherwise known as N-shares, into their global indexes, including MSCI Emerging Markets. Upon inclusion, China's index representation increased by more than 2%. Internet behemoths Alibaba, Baidu, and JD.com were added as constituents. In June 2017, MSCI decided to add China A-shares into its global equity indexes, including its Emerging Markets Index. The partial addition of A-Shares was initiated in May 2018 and will gradually increase. Assuming the full addition of China A-shares, China’s weight in the MSCI Emerging Markets Index will hover around 40%. Current top geographic exposures are China (30%), South Korea and Taiwan (each 10%-15%). On a sector basis, the index is tilted toward financials (20-25%) and information technology (15%). The index is not very concentrated at the stock level, with typically 20%-25% in the top 10 names.

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Fees

The exchange-traded fund's ongoing charge is 0.25%, making it amongst the cheapest passive funds in the global emerging-markets equity category. The annualised tracking difference (fund return less index return) during the past three years has been negative 0.02%, indicating that the total cost of holding this fund has been lower than the fund’s ongoing charge, helped by securities lending revenue. Additional costs to investors associated with trading the ETF include bid-ask spreads and brokerage fees.

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FundConstruction

The fund uses optimisation techniques to replicate the performance of the MSCI Emerging Markets Investable Market Net Return Index. From a liquidity standpoint, full physical replication can be expensive if the underlying securities are not easily accessible. As such, optimisation generates a proxy basket of securities. The fund uses futures for cash equitisation purposes, which helps limit tracking error. In order to gain exposure to certain securities, the fund may invest in American depository receipts and global depository receipts. ADRs and GDRs are investments issued by financial institutions that give exposure to underlying equity securities. The fund engages in securities lending to enhance the fund’s performance, lending up to 100% of the securities in its fund. Parent company and lending agent BlackRock covers the operational cost involved in securities lending for a 37.5% stake in the revenue generated from this activity, while the fund keeps 62.5%. Securities lending exposes the fund to counterparty risk--that is, the possibility that the borrower will not return the securities it borrowed. To manage this risk, BlackRock takes collateral greater than the total loan value. Collateral levels vary between 102.5% and 112%. Acceptable collateral includes equities (up to 40%), government bonds, and in some cases cash. During the past 12 months--as of 31 December 2018--the fund lent out 12.25% of its assets under management (on average) with a maximum on-loan of 15.36% and generated a net securities-lending return of 0.11%. BlackRock also provides indemnification for its iShares ETFs. If a borrower defaults and fails to return borrowed securities, BlackRock will replace them. The indemnification agreement is subject to changes without notice. iShares holds a dominant position in the European ETF marketplace by virtue of its comprehensive offering. The fund management process is robust. We value the wealth of experience of the people behind it and the extensive internal network supporting the operation.

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Suitability

IShares Core MSCI Emerging Markets IMI UCITS ETF’s low cost partially mitigates concerns about its concentrated country weightings, hence earning a Morningstar Analyst Rating of Bronze.

The fund’s ongoing charge of 0.25% makes it among the cheapest in the global emerging-markets equity Morningstar Category, which includes active funds. It is also one of the cheaper options within passives in the category. With relatively low cost and tight tracking ability, the fund has outperformed its peers that track the same MSCI EM Index.

However, the market-cap-weighted emerging-markets index has drawbacks. The fund carries notable country concentration risks with China accounting for more than 30% of the total portfolio, followed by Taiwan and Korea with weightings of 10%-15% each.

Such already-high exposure to Chinese stocks will increase further going forward. In June 2017, MSCI decided to add China A-Shares into its global equity indexes, including its Emerging Markets Index. The partial addition of A-shares was initiated in May 2018 and the inclusion will gradually increase. Assuming the full addition of China A-shares, China’s weight in the MSCI Emerging Markets Index will hover around 40%.

Compared with the more widely used MSCI Emerging Markets Index, the MSCI Emerging Markets IMI includes more small-cap stocks, representing about 5% of the index’s value versus the MSCI EM Index’s less than 1%. Investors can therefore look to this fund for slightly broader and more-diversified emerging-markets exposure. Small-cap companies tend to be more highly leveraged than their larger counterparts to their local markets.

The fund's inception was only in May 2014, and, as such, it has a short track record. Yet, category- and benchmark-relative performance have been good since the inception. The fund has beaten the average Morningstar Category peer. It has also lagged its benchmark by an amount lower than its ongoing charge, helped by securities-lending revenue.

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Fundamental View

Thanks to the dramatic changes in economic fundamentals and financial market development in emerging markets, the list of countries that constitutes emerging markets has evolved through time. Looking at the MSCI All Country World Index, which includes both developed and emerging markets, emerging markets represented a mere 1% of the index in 1988 with 10 countries. The figure rose to 11% with 24 countries by end-2018. The pace of such developments has further accelerated in recent years. 

From January 2001 to the end of February 2019, the MSCI Emerging Markets Investable Market Index’s annualised return amounted to 9.11%, versus 4.97% for the MSCI World Index (developed markets) and 5.10% for the MSCI All Country World Index. Such long-term total return figures reaffirm traditional rationale of investing in emerging markets--that is, capitalising on higher economic growths in relatively untapped countries. However, the ride in these markets is far from smooth sailing with greater drawdown and standard deviation compared with those of developed markets.  

The MSCI Emerging Markets Index has also changed materially over the past few years. In terms of country membership, the most significant changes have been the decline in Brazil (from a peak of 15.9% in September 2010 to 7.6% as of February 2019) and the increase in China (up to 32.1% from 18% during the same period). These divergent paths among countries show that emerging markets are heterogeneous. Each country has its specific economic or financial market drivers, such as natural resources for Brazil and technology industry for China, as well as unique currency dynamics. In December 2010, the energy and materials sectors represented a combined 29% but this weight declined to 15% by the end of 2018. On the contrary, the technology sector increased from 12% to 27% during the same period.

China’s weight in the MSCI Emerging Markets Investable Market Index is likely to continue increasing. In June 2017 MSCI announced that it would include China A-shares in the MSCI Emerging Markets and MSCI ACWI indexes. This is in recognition of the significant strides China has made toward opening its capital markets to foreign investors. As long as China’s economy continues growing and its impact on global capital market increases, its weights in emerging as well as global equity markets will increase.

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Alternatives

IShares is the only provider offering an ETF tracking the MSCI Emerging Markets IMI.

Alternatively, investors can turn to ETFs that track the better-known and widely followed MSCI Emerging Markets Index. The MSCI Emerging Markets Index is made up only of large- and mid-cap companies and covers 85% of each country’s free-float-adjusted market capitalisation. Its exposure is narrower compared with the MSCI Emerging Markets IMI, which also includes small-cap stocks.

Several providers offer the MSCI Emerging Markets Index trackers including iShares, Xtrackers, Amundi, and Lyxor. Ongoing charges range between 0.18% and 0.75%. The synthetically replicated accumulating Amundi MSCI Emerging Markets ETF with an ongoing charge of 0.20% is a direct alternative to this fund. It is one of the cheapest and best-performing ETFs tracking the MSCI Emerging Markets Index.

As an alternative, investors can look to Vanguard FTSE Emerging Markets ETF (ongoing charge: 0.25%). This ETF tracks a benchmark that excludes exposure to South Korea, which is considered a developed market by FTSE. FTSE is also considering adding China A-shares, but the timing is unknown.

In the strategic-beta department, investors may consider iShares MSCI Emerging Markets Minimum Volatility ETF (ongoing charge 0.40%) or Lyxor FTSE Emerging Minimum Variance ETF (ongoing charge 0.40%). Both indexes are designed to minimise volatility.

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