More to VWO’s Asset Loss Than Meets The Eye

One of the big ETF stories of this week is news that the Vanguard MSCI Emerging Markets (NYSEARCA:VWO) hemorrhaged $887 million in assets last month. Do not shed any tears for Vanguard MSCI Emerging Markets (NYSEARCA:VWO). This is still the largest emerging markets ETF and the third-largest U.S.-listed by assets with $56.8 billion, according to ETFdb data.

While Vanguard MSCI Emerging Markets (NYSEARCA:VWO) was losing assets in November, it’s primary rival, the iShares MSCI Emerging Markets Indx (NYSEARCA:EEM), was busying raking in $2.34 billion in fresh capital, Bloomberg reported.

On the surface, it appears VWO’s loss of assets can be blamed on Vanguard’s October announcement that the ETF and 21 of its other funds will stop using MSCI Indexes. VWO will move over to the FTSE Emerging Markets Index next year. Vanguard even said in the aforementioned Bloomberg piece it anticipated some asset “leakage” as a result.

So blaming VWO’s one-month asset woes on an index change and some pilfering by iShares MSCI Emerging Markets Indx (NYSEARCA:EEM) are nice, tidy excuses. They are convenient excuses, too. On the other hand, this could be like a suspense movie where the pieces of a major crime case fit together too nicely and, later on, one intrepid cop, probably named Jack, gets to the bottom of a wider-ranging problem.

In the essence of clarity, no one is saying Vanguard MSCI Emerging Markets (NYSEARCA:VWO) is going out of business. On the basis of its 0.2 percent expense ratio, one that will likely come down at some point, the fund will remain attractive to investors for years to come. It is also not overly ambitious to say VWO will remain one of the five largest ETFs.

However, maybe, just maybe, the November outflows highlight another situation: Competition. As in VWO faces a lot more competition than just EEM. It is convenient to think that every dollar that leaves VWO goes to EEM, but the reality is that probably is not the case. Perhaps VWO’s November outflows indicate that investors are becoming a bit more savvy when it comes to multi-country emerging markets ETFs.

Take the example of the WisdomTree Emerging Markets Eqty Incm Fd (NYSEARCA:DEM). Yes, DEM charges 0.63 percent per year, more than triple VWO’s expense ratio. DEM makes up for that with a dividend yield that is more than 240 basis higher than VWO’s. Over the last 24 months, DEM has been the better performer and 400 basis points less volatile than Vanguard MSCI Emerging Markets (NYSEARCA:VWO).