The global broad sector equity ETF collected $17 billion in net ETF inflows in January. The sub-category of ETFs includes market-cap weighted equity ETFs domiciled in several countries. According to our data, the most popular of these ETFs was $4 billion iShares MSCI Kokusai ETF (TO), which invests in Japan’s pre-developed markets. At the end of January, 73% of assets were invested in US companies, but the fund was partially funded in the United Kingdom (5%), Canada (4%), France (4%), Switzerland (3%), etc. was diversified. While CFRA doesn’t know what contributed to the massive inflows for TOK in January, we think the ETF was bought by a large Japanese institutional investor seeking diversified equity exposure to avoid domestic bias. was doing.
Vanguard FTSE Developed Markets ETF (VEA) And iShares Core MSCI EAFE ETF (IEFA) In January, net worth of $108 billion and $102 billion were collected, raising assets of $2.2 billion and $1.8 billion, respectively. As the sixth and seventh largest US-listed ETFs and the largest to invest internationally, VEA and IEFA are well-known funds for obtaining non-US exposure. Although there is a slight difference in fees—VEA charges a 0.05% expense ratio which is two basis points lower than IEFA—the performance difference between funds is primarily driven by the markets they provide exposure. For the three-year annual period ended January, VEA outperformed IEFA by 35 basis points. 31.
IEFA has a higher exposure than VEA in Japan (23% of assets) and the UK (16%), but is not owned in Canada or South Korea. While the acronym EAFE has become in line with developed international markets, the MSCI Index tracked by IEFA warrants some scrutiny. MSCI classifies South Korea as an emerging market, not a developed market, as does FTSE Russell, the index firm behind VEA. As a result, IEFA does not own shares of companies such as Samsung Electronics, which is VEA’s second largest recent position and its 5% of assets contribute heavily to the country’s share. Meanwhile, the third largest country with VEA exposure is Canada (9.5% of year-end assets), but this country is not part of the EAFE region and is not part of IEFA.
Figure 1: Country Exposure (% of Assets) of Popular Developed International Equity ETFs
Despite its marginally underperforming over the past three years, CFRA believes that IEFA VEA and the broader global equity ETF category are more likely to outperform in the next nine months. Based on the holdings and performance record, we see high reward potential for IEFA. More importantly, investors looking to invest in developed equity markets need to look inside a fund, not just its name, expense ratio or net inflows.
Todd Rosenbluth is the Director of ETFs and Mutual Fund Research at CFRA. Learn more about CFRA’s ETF research here,