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ETF Specialist

A Costly Choice for Investing in Emerging-Markets Stocks

IShares MSCI Emerging Markets ETF's high fee sticks out like a sore thumb.

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 IShares MSCI Emerging Markets ETF (EEM) offers broad, market-cap-weighted exposure to over 800 large- and mid-cap stocks across 23 emerging markets. It effectively diversifies risk, accurately represents its target market segment, and charges a 0.69% expense ratio, which is well below the diversified emerging-markets Morningstar Category average. But there are cheaper and even better diversified passive alternatives, such as  iShares Core MSCI Emerging Markets ETF (IEMG), which charges a 0.14% expense ratio.

Similar to its market-cap-weighted peers, this exchange-traded fund has significant exposure to individual country risk. Despite the inclusion of 23 emerging markets, China (26%), South Korea (15%), and Taiwan (13%) jointly account for over half of the portfolio because of their large relative size. The same three countries make up less than 40% of the typical actively managed fund in the category. MSCI, the firm behind the fund's index, is also considering adding China A-shares, which would further increase the fund's allocation to Chinese stocks.

Matthew Diamond does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.