EEM: The Founding Father of Emerging Market ETFs – A Deep Dive into its Legacy and Modern Relevance

Once considered a frontier for the most adventurous investors, emerging markets have transformed into a cornerstone of global portfolios, offering dynamic growth opportunities. At the forefront of this revolution stands the iShares MSCI Emerging Markets ETF (EEM), not just an investment vehicle, but a pivotal piece of financial history that democratized access to these vibrant economies.

Launched in 2003, EEM was a game-changer.

It quickly became the go-to option for investors seeking diversified exposure to countries like China, India, Taiwan, and Brazil. For nearly a decade, it reigned supreme, providing a straightforward and liquid way to tap into the high-growth potential of developing nations. Its methodology involved tracking the MSCI Emerging Markets Index, an equity benchmark designed to measure the performance of large and mid-cap securities across 24 emerging market countries.

Crucially, EEM employs a “capped” methodology, which limits the weight of any single country or individual company, aiming to reduce concentration risk and ensure a degree of diversification within its portfolio.

However, the investment landscape never stands still, and even pioneers face new challenges.

The arrival of the iShares Core MSCI Emerging Markets ETF (IEMG) in 2012 marked a significant shift. IEMG, designed to be a broader and more cost-efficient alternative, offered investors more extensive coverage of the emerging market universe, encompassing a greater number of holdings and a remarkably lower expense ratio.

This introduced a direct rival that, on paper, presented a compelling case for new allocations to the asset class.

When we compare EEM with its younger, more robust sibling, the differences become stark. EEM, with its expense ratio of 0.68%, appears significantly more expensive than IEMG, which charges a mere 0.09%.

This substantial fee differential, compounded over years, can erode returns significantly. Furthermore, IEMG boasts a much larger portfolio, holding around 2,900 stocks compared to EEM's approximately 1,200. This broader diversification, coupled with IEMG's superior liquidity and tighter bid-ask spreads, positions it as the more advantageous choice for new capital seeking exposure to emerging markets.

Performance figures echo this sentiment.

Over various periods—one, three, five, and ten years—IEMG has consistently demonstrated a slight outperformance over EEM. While the underlying indices they track are similar, IEMG's lower expense ratio and broader market capture often translate into superior net returns for investors. This leaves a lingering question: why does EEM, with its higher fees and comparatively narrower scope, still command billions in assets under management?

The answer lies largely in its unique position as a market pioneer and its embedded status within countless legacy portfolios.

For many institutional investors, wealth managers, and even long-term individual investors, EEM was the original and only viable option for emerging market exposure for many years. Swapping out such a well-established position can involve tax implications, rebalancing complexities, and simply the inertia of an existing, functional allocation.

Therefore, EEM continues to serve as a vital trading vehicle for active managers, maintaining its relevance through sheer market presence and historical momentum.

In conclusion, while the iShares MSCI Emerging Markets ETF (EEM) holds an undeniable place in financial history as the trailblazer for emerging market equity exposure, its practical utility for new investments has largely been surpassed.

For investors seeking efficient, low-cost, and broadly diversified access to emerging markets today, IEMG presents a more compelling and economically sound option. EEM remains a significant player due to its historical impact and existing allocations, but for forward-looking portfolio construction, it's wise to consider the evolution of the ETF landscape.