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Todd Shriber

Todd Shriber has written on ETF and investing related topics for sites including Bloomberg, ETF Trends, Benzinga, Investopedia and has been quoted on CNBC, Wall Street Journal, Barrons

International mutual funds and exchange traded funds (ETFs) typically carry higher fees than domestic equivalents and this is particularly true of emerging markets funds. While there are plenty of emerging markets index funds and ETFs that carry low fees, there are also plenty of actively managed mutual funds in this category that can still be considered expensive.

As they should do with other asset classes, financial advisors should consider low-fee options when allocating client capital to emerging markets funds for multiple reasons, including long-term returns and the performances of active managers in the international equity space.

Consider this: a $100,000 investment that generates a 6% annually in returns without any fees would be worth $430,000 in 25 years, but that same stake with the same returns with 2% in annual fees would be worth just $260,000 in 25 years, according to Vanguard.

Then there is the matter of performance, or lack thereof, by active managers in the international equity space. As of the end of 2017, “over the 3-, 5-, 10-, and 15-year investment horizons, managers across all international equity categories under-performed their benchmarks. Furthermore, the longer the time horizon, in general,the more funds under-performed,” according to the SPIVA scorecard from S&P Dow Jones Indices.

Raltin performs 2.5 billion correlation calculations across 40,000 stocks, ETFs, and mutual funds to show financial advisors which ETFs most closely mimic their clients’ mutual fund holdings.  As demonstrated by the table below, the performance of many ETFs is highly correlated with well-known mutual funds - but with significantly lower expense ratios.

Correlations Between The T. Rowe Price Emerging Markets Stock Fund (PRMSX) And Select ETFs

RankMost Similar ETFs to T. Rowe Price Emerging Markets Stock Fund (PRMSX)
1SCHE (0.91,1.07)
2IEMG (0.91,1.06)
3EEM (0.91,1.11)
4VWO (0.90,1.08)
5SPEM (0.90,1.04)

The table above highlights correlations between the T. Rowe Price Emerging Markets Stock Fund (PRMSX) and related ETFs. PRMSX carries an annual fee of 1.23%, the equivalent of $123 on a $10,000 investment.

Even when excluding the iShares MSCI Emerging Markets ETF (EEM), which is cheaper than PRMSX but pricey among emerging markets ETFs, advisors can find several compelling, cost-effective alternatives to the T. Rowe Price fund.

  • The Schwab Emerging Markets Equity ETF (SCHE) has a five-year correlation score of 0.91 to the  T. Rowe Price Emerging Markets Stock Fund, but SCHE charges 0.13% per year, or $13 on a $10,000 investment. Plus, advisors that custody with Schwab can transact in SCHE (and other Schwab ETFs) on a commission-free basis.
  • The iShares Core MSCI Emerging Markets ETF (IEMG), one of the largest emerging markets ETFs in the U.S., also has a five-year correlation score of 0.91 to PRMSX and charges just 0.14% per year.
  • The SPDR Portfolio Emerging Markets ETF (SPEM) is often overlooked in the emerging markets ETF conversation, but this fund has a 0.90 correlation to PRMSX and charges just 0.11%, annually making it the cheapest emerging markets ETF in the U.S.
All of the funds with high correlations to the actively managed T. Rowe Price Emerging Markets Stock Fund have the same objective: deliver broad-based emerging markets equity exposure, but as the Raltin data confirm, the ETFs accomplish that objective with superior cost efficiencies.

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