IEMG: The Risk Isn't Worth The Reward

seekingalpha05-13

aluxum Investment Thesis iShares Core MSCI Emerging Markets ETF (NYSEARCA:IEMG) warrants a sell rating due to multiple negative factors for the fund. Despite the recent underperformance of emerging ...

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Despite the recent underperformance of emerging ...</p>\n\n<a href=\"https://seekingalpha.com/article/4692721-iemg-the-risk-isnt-worth-the-reward\">Source Link</a>\n\n</div>\n","source":"seekingalpha_fund","html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>IEMG: The Risk Isn't Worth The Reward</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nIEMG: The Risk Isn't Worth The Reward\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-05-13 18:54 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4692721-iemg-the-risk-isnt-worth-the-reward><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>aluxum Investment Thesis iShares Core MSCI Emerging Markets ETF (NYSEARCA:IEMG) warrants a sell rating due to multiple negative factors for the fund. Despite the recent underperformance of emerging ...</p>\n\n<a href=\"https://seekingalpha.com/article/4692721-iemg-the-risk-isnt-worth-the-reward\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"BK4534","symbol_name":"瑞士信贷持仓","start_time":0,"source_url":"https://seekingalpha.com/article/4692721-iemg-the-risk-isnt-worth-the-reward","article_id":"2435237443","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/183829224/image_183829224.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2435237443","pubTimestamp":1715597688,"sourceInfo":{"source_id":"seekingalpha_fund","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"aluxum Investment Thesis iShares Core MSCI Emerging Markets ETF (NYSEARCA:IEMG) warrants a sell rating due to multiple negative factors for the fund. 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Despite the recent underperformance of emerging market funds, there are no sufficient catalysts to significantly reverse this trend. While IEMG offers investors a high quantity of holdings, they have been increasingly concentrated around Chinese and Taiwanese companies. This trend has both increased the correlation with domestic and international indexes, as well as heightened geopolitical risk. Therefore, while IEMG and peer funds offer a low expense ratio and noteworthy dividend yield, these positive factors do not outweigh the risks. Fund Overview and Compared ETFs IEMG is a passive ETF that seeks to track its benchmark index, the MSCI Emerging Markets IMI Net Index. With its inception in 2012, the fund has 2,934 holdings and $78.76B in AUM. The fund seeks to capture large, mid, and small caps with largest weight by sector in information technology (22.02%), financials (20.22%) and consumer discretionary (12.80%). Geographically, IEMG’s largest country by weight is in China (23.69%), followed by India (18.48%) and Taiwan (17.88%). For comparison purposes, other funds examined are the Vanguard FTSE Emerging Markets ETF (VWO), the Schwab Emerging Markets Equity ETF (SCHE), and the SPDR Portfolio Emerging Markets ETF (SPEM). VWO offers greater diversification with over 5,000 holdings and is more concentrated on China, India, and Taiwan holdings than IEMG. SCHE is the heaviest in financials with reduced weight in IT compared to IEMG. SCHE also has a heavier weight in Chinese holdings than IEMG and is the least diversified fund compared. SPEM has been the best performing ETF in multiple time periods and has the least weight on the IT sector. The fund is also the heaviest on Chinese holdings. ETF Comparison: Performance, Expense Ratio, and Dividend Yield IEMG has an average annual performance over the past decade of just 3.16% each year. SPEM has been the best performing fund examined, with a 10-year average annual return of 3.84%. All compared emerging market funds have significantly lagged the U.S. market, which has seen a 10-year average annual return of 12.4%, as measured by the S&P 500 Index. 10-Year Total Price Return: IEMG and Compared Emerging Market Funds (Seeking Alpha) All funds compared have very competitive expense ratios, even for passively managed funds. IEMG’s 0.09% expense ratio is low, but still beaten by VWO and SPEM. Another advantage for IEMG and peer emerging market funds is their dividend yield. Each emerging market fund examined has yields ranging from 2.6% to 3.6% which have been growing over the past five years. Expense Ratio, AUM, and Dividend Yield Comparison     IEMG VWO SCHE SPEM   Expense Ratio 0.09% 0.08% 0.11% 0.07%   AUM $78.76B $103.81B $8.86B $8.90B   Dividend Yield TTM 2.74% 3.35% 3.61% 2.64%   Dividend Growth 5 YR CAGR 2.34% 5.99% 8.45% 5.56%   Click to enlarge Source: Seeking Alpha, 11 May 24 IEMG Holdings and Major Risk Factors Despite the massive diversification for IEMG and peer funds, their top holdings are relatively similar. These include Taiwanese companies such as Taiwan Semiconductor Manufacturing Co. (2330), as well as Chinese Tencent Holdings Ltd. (700) and Alibaba Group Holding Ltd. (9988). Over 10% of each ETF's weight is focused on these three companies. Top 10 Holdings for IEMG and Compared Emerging Markets ETFs    IEMG 2,934 holdings   VWO 5,848 holdings   SCHE 1,995 holdings   SPEM 3,447 holdings    2330 – 7.00% 2330 – 6.77% 2330 – 8.29% 2330 – 6.86%   700 – 3.63% 700 – 3.00% 700 – 4.11% 700 – 3.44%   005930 – 3.22% 9988 – 1.92% 9988 – 2.35% 9988 – 1.76%   9988 – 1.85% RELIANCE – 1.50% RELIANCE – 1.58% RELIANCE – 1.43%   RELIANCE – 1.18% HDFCBANK – 1.21% HDFCBANK – 1.37% HDFCBANK – 1.15%   PDD – 0.94% PDD – 0.88% PDD – 1.16% PDD – 1.06%   3690 – 0.89% 3690 – 0.82% 3690 – 1.14% ICICIBC – 0.90%   ICICIBC –0.81% INFY – 0.79% GVMXX – 1.11% 2317 – 0.85%   000660 – 0.80% 2317 – 0.72% 2317 – 0.89% 939 – 0.78%   2317 – 0.75% 939 – 0.70% 939 – 0.88% 3690 – 0.77%   Click to enlarge Source: Multiple, compiled by author on 11 May 24 While IEMG and peer funds include Indian holdings such as Reliance Industries Ltd. (RELIANCE) and ICICI Bank (ICICIBC), there is a relatively high concentration on Chinese and Taiwanese companies. This concentration elevates both geopolitical risk and the correlation of emerging market funds with U.S. and international indexes. These risk factors are further broken down below. Downside #1: Underperformance with Significant Correlation The first major downside for emerging market funds is their underperformance paired with a surprisingly high amount of correlation to U.S. domestic and international markets. Over the past five years, the MSCI emerging markets index has underperformed the S&P 500 Index each year. While Goldman Sachs projects the Chinese economy to surpass the U.S. in 2035, recent real estate woes and an aging population risk upending this forecast. Emerging Markets vs. S&P 500 Index Returns: 2019-2023   Index 2019 2020 2021 2022 2023   MSCI Emerging Markets 18.42% 18.31% -2.54% -20.09% 9.83%   S&P 500 31.49% 18.40% 28.71% -18.11% 26.29%   Click to enlarge Source: Compiled by Author from Multiple Sources, 11 May 24 The underperformance in emerging markets could be tolerated if it had a low correlation to U.S. markets. However, this is not the case. Trailing 3-year correlations for the MSCI emerging market index has been over 0.75 compared to the S&P 500. Therefore, in times of steep corrections and bear markets in the U.S. market, emerging markets will likely see declines as well. This has been consistent for the past two decades and is evident in recent performance. MSCI Emerging Market, MSCI World, and S&P 500 Correlation, 2004-2020 (Morningstar Direct) Downside #2: Geopolitics and Limited GDP Growth In addition to the underperformance discussed above, there are clear risks specific to emerging markets. In 2021, the Biden Administration banned U.S. investment in 59 Chinese companies through an executive order due to their ties in surveillance and defense industries. China and Taiwan represent IEMG’s #1 and #3 top weight by nation, respectively. This is further fueled by the proportion of global market indexes that include China and Taiwan. In 2007, China and Taiwan constituted less than 30% of the emerging market index. Today, China and Taiwan represent roughly 50% weight in the MSCI Emerging Markets Index. This is characteristic of IEMG and all compared funds as well. MSCI Emerging Markets Index Composition by Nation, 2001-2020 (Morningstar Direct) Geopolitical risk aside, there is a muted forecast for GDP growth in several emerging markets. Therefore, even if U.S. domestic markets see smaller returns in coming years, it is not evident that emerging markets will be superior. China’s GDP growth is expected to slow to about 3.5% in 2028 due to productivity and population demographics. This growth is a far cry from the nearly 10% growth in the early 2000s. Increased tensions between the U.S. and China are projected to potentially drag down global economic growth by as much as 7%. Therefore, the combination of geopolitical risk and reduced economic growth is concerning. As an alternative, I would have liked to have seen greater weight on Indian holdings for IEMG as the nation is expected to see an average real growth rate of 8% through 2030. Current Valuation  IEMG and compared emerging market funds have seen recent returns that have lagged the U.S. market. This is consistent with the comparative performance over the past decade. Due to their muted performance over the past five years, IEMG and compared funds all have relatively attractive valuations compared to the U.S. market. One-Year Return for IEMG and Peer Emerging Market ETFs (Seeking Alpha) Using P/E and P/B ratios as a measure of valuation, IEMG is the least attractive of peer funds. However, all emerging market ETFs have more desirable P/E and P/B ratios compared to the U.S. market. Utilizing the S&P 500 Index as a measure of U.S. market performance, the S&P 500 has a P/E ratio of 27.14, significantly higher than its own historic median. Valuation Metrics for IEMG and Peer Competitors     IEMG VWO SCHE SPEM   P/E ratio 15.32 14.20 14.25 12.99   P/B ratio 1.78 2.00 2.09 1.77   Click to enlarge Source: Compiled by Author from Multiple Sources, 11 May 24 Risks to Investors Risk factors already discussed are the high geographic concentration on China and Taiwan, the corresponding geopolitical risk, and unimpressive GDP growth expected in the region. Additionally, emerging market investors can expect a modest correlation to U.S. and international markets. This correlation can be measured by beta value, which stands at 0.69 for IEMG over the past three years compared to the S&P 500. IEMG is also roughly as volatile as U.S. markets, as measured by its standard deviation. While the S&P 500 has a 3-year trailing standard deviation of 17.39%, IEMG has seen a 3-year standard deviation of 17.71%. Concluding Summary  Emerging market ETFs such as IEMG have a high number of holdings with a noteworthy dividend yield and relatively low expense ratio. However, IEMG and peer funds are heavy on Chinese and Taiwanese companies. Subsequently, the funds present multiple risk factors including suboptimal performance as measured by the expected GDP growth as well as geopolitical risk. Additionally, these funds have a fair amount of correlation with U.S. and international indexes and should therefore not be thought of as an uncorrelated asset for diversification-seeking investors. Ultimately, the fund is a sell for me as the risk factors do not outweigh the projected returns. Personally, I will keep an eye on this fund and wait for greater geographic diversification to capture nations with greater projected GDP growth and reduced geopolitical risk.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.0","shortVersion":"4.29.0","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2435237443"}