The two emerging market ETFs listed on NYSE – iShares Emerging Market ETF (EEM) and Vanguard Emerging Market (VWO). For EEM, it is trailing the index by 5.8% year-to-date while VWO is trailing by 1.7%. EEM’s poor performance is alarming considering it supposed to track the index. Having a tracking error of 5.8% is definitely not acceptable. You can read the reasons why from this article HERE.

The corresponding ETF listed on London stock exchange for iShares Emerging Market ETF is IEEM.L. This is the preferred ETF compared with EEM because of taxation reason. The IEEM.L is trailing by 2.61% compared with index. The tracking error is much smaller but it is still quite large.

The above figures as at end of September 2009.

In a meantime, on September 2009 iShares launched accumulating class ETFs in Europe. These ETFs will reinvest dividends automatically. You can read the press release HERE. However, the taxation implication to me is unclear for Singapore investors. Moreover, the fund size for the accumulating share class for iShares Emerging Market ETF and iShares MSCI World ETF are US$5m and US$10m respectively. Obviously this is Barclay’s seed money. It is advisable to wait and see in view of the small fund sizes.

Some people may ask whether is there a better alternative compared with Barclay’s iShares in view of its major unperformance. It cannot be ignored that swap-based ETF such as db x-trackers MSCI Emerging Market TRN Index ETF listed on major European stock exchanges is actually outperforming the index. This ETF reinvest all dividends. When compared with the appropriate index, it actually outperforms. As on 5 Oct 2009, the ETF return was 63.22% compared to the index’s 62.52% Likely reason has to do with the improved tax efficiency due to its swap-based approach. However, personally I dislike such major use of derivative and we can view the outperformance as compensation for the usage of such derivative. In other words, the additional percentage point outperformance is merely a compensation of an increased in risk. No free lunch I guess...

Indexing used to be simple and a brain dead exercise. These days, it has become so complex...