Thursday, 17 December 2009

Emerging Market ETFs Compared - Canadian-Traded ETFs

The preceding post introduced Emerging Market ETFs and compared the mainstream alternatives traded in US markets. This post now looks at the EM funds traded in Canada and gives my overall opinion.

ETFs Traded in Canada

The main choices below are clones of the US funds. They offer a Canadian investor the convenience of being traded in Canadian dollars, which means avoiding the foreign exchange conversion fee (implicit in the buy vs sell rates) of about 0.5% charged by discount brokers. That, plus convenience features like automatic free dividend reinvestment (DRIP), pre-authorized chequing contributions (PACC) and systematic withdrawal plans (SWP) may offset the annual extra expense ratio of 0.1 to 0.3% compared to the US version of the fund. All are very recent, having been launched in 2009.
  • BMO Emerging Markets Equity ETF (ZEM) - newest entrant in October 2009 and still tiny, consists primarily of VWO with other ETFs to boost holdings in India, Taiwan and Russia. Boasts the lowest MER amongst the Canadian ETFs
  • iShares CDN MSCI Emerging Markets Index Fund (XEM) - holds only EEM; and adds only 0.10% to that fund's MER. The strength of the Canadian dollar and/or the weakness of the USD vis-avis Emerging Market currencies is evident in this chart showing how XEM, in CAD, has under-performed EEM, in USD
  • Claymore Broad Emerging Markets ETF (CWO) - holding 100% VWO and is hedged to USD, but is this the right currency to hedge? see assessment of hedging by CanadianFinancialDIY Hedging imposes costs on the fund and CWO is already significantly under-performing the US parent VWO as this chart shows
Comparison Table

Which is the best EM ETF for the Canadian investor? (my opinion only, see disclaimer below!)
For someone with a reasonably large EM holding of $10,000 or more, or who can avoid currency fees by either having an account that can hold US currency or through doing wash trades (see's explanation for registered accounts), I prefer iShares' EEM for its close tracking of the MSCI, and its good diversification. ADRE is an interesting large cap alternative with low costs and good historical performance.

For small holdings and to trade in Canadian dollars, two ETFS I find to be fairly equal: XEM for its mimicing of the US alternative I like best and ZEM for its low MER and DRIP, though its size is (till it attracts investors) a disadvantage.

Disclaimer: this post is my opinion only and should not be construed as investment advice. Readers should be aware that the above comparisons are not an investment recommendation and that past performance may not continue, costs may change and other comparative factors like taxes may alter their value to you. Do your homework before making any decisions.

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