As I discussed yesterday my Emerging Markets Allocation in my Low Charge Portfolio had fallen to 3.2% against a target allocation of 5.0%. This was a variation of 37% against my target which was by far the worst of any of my asset classes. I’ve therefore used 0.8% of my total portfolio value held in cash to buy into the db x-trackers MSCI EMERGING MARKETS TRN INDEX ETF with ticker symbol XMEM on Friday afternoon. This gives me an allocation to emerging markets now of 4.0%.
As always I checked the internet and can still only find 3 sensibly low cost ETF’s. These are the:
- db x-trackers MSCI EMERGING MARKETS TRN INDEX ETF with ticker symbol XMEM and a TER of 0.65%
- Lyxor MSCI Emerging Markets (TR) GBp (LSE) with ticker symbol LEME and a TER of 0.65%
- iShares MSCI Emerging Markets with ticker symbol IEEM and a TER of 0.75%
If anybody knows of any other options for UK investors then please leave a comment as I would love to know about it. I already hold XMEM but chose to buy again as when considering both fees and taxes, along with the fact that I am buying XMEM in my ISA, I still think it provides the minimum penalty when it comes to the cost of fees and taxes as I explained here. This is one of the cornerstones of my strategy – minimising fees and taxes. There are so many out there trying to get their hands on part of your return (HM Revenue & Customs, Financial Planners, Fund Managers) and given the miracle of compound interest I really am trying to minimise what I have to give away to maximise my return.
For those that are interested the reasoning behind my emerging markets allocation in my low charge portfolio can be found here.
As always do your own research.
I stick with IEEM, it is the only of those three which uses physical replication, i.e. it isn't like buying a complicated derivative. Also the Lyxor ETF is French-domiciled and has potentially complex tax issues. -Lemondy-
ReplyDeleteAlso, usually iShares ETFs usually have a lower bid/offer spread than their counterparts; a quantifiable (if small) part of your fees calculation. At time of writing:
ReplyDeleteXMEM: spread = 0.63%
IEEM: spread = 0.26%
LEME: spread = 1.24%
@Lemondy
ReplyDeleteThanks for sharing. The Lyxor tax issues I was well aware of which is detailed in one of the links of the post and is why I stayed away from Lyxor. Thanks though for highlighting the derivative aspect. That is definitely something for further consideration as it brings counterparty risk into the argument.
@Anonymous
Thanks also for highlighting the bid offer spread variations. I use TD Waterhouse as my ISA platform and I'm not seeing spreads quite as big as you highlight. For XMEM I am seeing a spread of 0.54% and for IEEM I am seeing 0.29%. Unfortunately though it still means I have to hold XMEM for 3.5 years just to break even. Could I ask what trading platform you are using?
I'm going to investigate both aspects further before buying anymore emerging market ETF's.
@Lemondy
ReplyDeleteJust had a quick look at XMEM and IEEM from a derivative perspective. Could you explain a little more about what you know about the differences between XMEM and IEEM when it comes to derivatives?
If I look at the iShares prospectus on pp33 under the heading "Financial Derivative Instrument Risks" it states "Each Fund may use derivative instruments for the purposes of efficient portfolio management or, where stated in the investment policy of a Fund, for direct investment purposes..." Also on the same page under "Uncollateralised Financial Derivative Instruments" it states "In addition to the risks associated with trading in FDIs, trading in FDIs which have not been collateralised gives
rise to direct counterparty exposure..." This seems to imply iShares are using derivatives.
The db x-trackers XMEM factsheet states that "The sub-fund may be exposed to a maximum of 10% derivative counterparty risk in accordance with the UCITS III investment restrictions". So they are definitely using derivatives but it seems to imply that in the event of counterparty failue worst case is a loss of 10%.
Any more information you could share would be most appreciated.
An ETF using "physical" replication means the provider is holding a basket of stocks to back the ETF which replicate the index and provide the matching returns; similar to how any unit trust/OEIC would do.
ReplyDeleteWith synthetic replication the ETF is basically a bet with an investment bank; the IB says it will match the returns of the underlying index (however it likes), and provides collateral for that deal. The UCITS structure requires a minimum of 90% collateralisation, so the ETF should lose a maximum of 10% of its assets should the IB fail. In practice DB say they provide > 100% collateral.
@Anonymous
ReplyDeleteThanks for the information. I think I'm prepared to take the risk of losing 10% should the IB fail given how many IB's we've seen fail over the long term. Should we see another Lehmans stock prices are going to be down a lot more than 10%. In that situation I'd be a buyer so would possibly still win in the long term.
The buy/sell spreads though are certainly food for thought and something I am now going to watch.