4 iShares Global Ex-US ETFs: Which One Is Best?

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Includes: ACWX, EFA, IEFA, IXUS
by: Jiri Mikes
Summary

iShares is providing four big global ex-U.S. ETFs with plain strategies.

They are similar but not identical.

Which one is the best?

As I pointed out in my last article, some people still do not see a difference between ETFs that are similar but not the same. Last time, I wrote a few words about three global ex-U.S. ETFs from Vanguard; in this article, the second in a short series, I will focus on iShares (managed by BlackRock – the world’s biggest asset manager).

iShares; Global ETF

EFA or IEFA...ACWX or IXUS

iShares, of course, provides a big range of global ex-U.S. ETFs, but speaking about plain strategy, there are four basic ETFs, which are also the largest and most popular. I am speaking about iShares MSCI EAFE ETF (EFA; Fact Sheet), iShares Core MSCI EAFE ETF (IEFA; Fact Sheet), iShares MSCI ACWI ex-U.S. ETF (ACWX; Fact Sheet) and iShares Core MSCI Total International Stock ETF (IXUS; Fact Sheet). All these four ETFs are tracking indices provided by MSCI, which is the first important point. Why?

Unlike FTSE indices (tracking by the Vanguard ETFs mentioned in the previous article), MSCI still does not classify South Korea as a developed market, so you will not find this country in EFA and IEFA – two ETFs that focus on developed countries outside of the U.S. But that’s not all. Speaking of developed countries, there is also another important thing. The “EAFE” in MSCI EAFE stands for Europe, Australasia and the Far East, which means that this range of indices measure the equity market performance of developed markets not only outside of the U.S. but also outside of Canada (although Canada is, of course, a developed market). Some investors may welcome this, others not. Either way, it is another important difference between iShares and Vanguard ETFs, and you should have it in mind.

Table 1: EFA, IEFA, ACWX, IXUS; source: iShares

AUM (mil. USD)

Avg. Daily Volume

TER

12m Trailing Yield

Benchmark Index

Number of Holdings

Region (ex U.S.)

Market cap.

EFA

$71,530M

22 207 417

0.32 %

3.04 %

MSCI EAFE Index

930

Developed (ex Canada)

large/mid

IEFA

$58,328M

6 055 574

0.08 %

2.90 %

MSCI EAFE IMI Index

2508

Developed (ex Canada)

All

ACWX

$3,067M

493 707

0.32%

2.59 %

MSCI ACWI ex USA Index

1278

Developed +EM

large/mid

IXUS

$10,493M

541 119

0.10%

2.72 %

MSCI ACWI ex USA IMI Index

3442

Developed +EM

All

But what are the differences between the four iShares ETFs? Well, Table 1 might help. iShares MSCI EAFE ETF tracks the MSCI EAFE Index, which I have already mentioned and which focuses on developed countries outside of the U.S. and Canada, but only large- and mid-cap companies. By comparison, the iShares Core MSCI EAFE ETF tracks the MSCI EAFE IMI Index, which means the same countries as EFA – however, this ETF focuses not only on large- and mid-cap but also on small-cap companies. What is interesting is the high difference in fees. Although IEFA is a smaller and less liquid ETF, the TER is only 0.08 % p.a. compared to 0.32 % p.a. for EFA. Four times less. As you can see in Charts 1 and 2, the regional and sector allocations of EFA and IEFA are almost the same, which is no surprise given that these ETFs have 77 % of holdings in common by weight, according to the ETF Research Center's Overlap Analysis tool. However, IEFA has still the bigger diversification – the weight of the top 100 positions in IEFA is 38.92 %, compared to 46.14 % in EFA. I am not saying it is a huge difference, but it is a difference. And if you look at Chart 3, you will see that IEFA is also a clear winner if we are speaking about a return over the longest possible period (IEFA and IXUS were launched in October 2012)

Chart 1: Regional allocation (click to enlarge); source: iShares

iShares_regional

Chart 2: Sector allocation (click to enlarge); source: iShares

iShares_sectors

The difference between ACWX and IXUS is the same as between EFA and IEFA – however, you will also get exposure to emerging markets and Canada. So, ACWX tracks the MSCI ACWI ex-U.S. Index, which focuses on developed and emerging markets, as well as large- and mid-cap companies. IXUS tracks the MSCI ACWI ex-U.S. IMI Index – so once again developed and emerging markets, but this time not only large- and mid-cap but also small-cap companies. The TER of ACWX is 0.32 %, compared to 0.10 % for IXUS. If we use the same metric as in the previous two ETFs, the top 100 positions in IXUS have the weight of only 31.92 % compared to 39.53 % in AXUS. This is only logical because IXUS also have the biggest number of components – 3,442 companies of all sizes from all around the world. There is also a slightly bigger difference between ACWX and IXUS because these ETFs have “only” 64 % (compared to 77 % for EFA vs. IEFA) overlap by weight according to the ETF Research Center. In Charts 1 and 2 you can see the regional and sector allocations of both ETFs. Once again, however, as I wrote in my previous article, it is important to know that sector allocation is not based on a portfolio management decision, but it is simply the result of the sector allocation of individual regional stock exchanges (countries) and their weight in the index. In Chart 3, you can see that speaking about returns, IXUS is slightly better than AXUS.

So, which ETF is the best?

Chart 3: Return and volatility; source: ETFreplay.com

And the winner is….

One could say “why to bother with choosing the right ETF when all four are so similar and have such a high correlation?” Well yes, this is true, but why not get a “free” return even if it were only a few tenths of a percent extra per year, or get better diversification? Focusing only on return (and volatility), we could say that IEFA is the winner. But we must not forget that the outperformance of IEFA/EFA vs. AXUS/IXUS is caused by the fact that AXUS and IXUS have also emerging markets (and Canada) in their portfolio and emerging markets have been a bit tricky in the last couple of years. But this does not mean that such a situation will be the case also in the future.

So, if you want to have only one ETF that covers almost everything outside the U.S., I would pick IXUS, of course, out of the iShares ETFs. It is cheaper than AXUS, has a slightly better return and better diversification. The only problem is average daily volume, which is much lower for both AXUS and IXUS than for IEFA or EFA. If you are a trader, this could be a problem and you should look elsewhere. But for the long-term/buy and hold (small) investor, it should be enough, although I would really welcome a bigger liquidity.

If you already have exposure to emerging markets or you want to use one or more separate ETFs to gain such exposure, then I would choose IEFA. It is four times cheaper than EFA and has better diversification and enough liquidity (although three/four times lower than that of EFA). But do not forget that if you choose IEFA (or EFA), you will not have exposure to Canada (and South Korea). I am not saying it is good, I am not saying it is bad, but you should know it. Either way – as always – do not forget to do your DD…

So, Vanguard and iShares are done, next time I will look at the rest…

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.