Emerging Markets Small Cap ETF (EEMS)

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Hedgy
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Emerging Markets Small Cap ETF (EEMS)

Post by Hedgy » Mon Sep 19, 2011 10:47 am

Apologies if this ETF has been discussed here before, but my search indicated it hasn't.

It's a new ishares ETF, inception last month.

ER is 0.69%, which is high. And I already have VSS, which includes 26% emerging markets and a much lower ER.

However, EEMS has a median market cap of 408 million, whereas VSS's median market cap is $1.4 billion.

So it seems that EEMS has much higher loading on the size factor.

Anyone have any thoughts, or care to comment about this ETF? Anyone invest in this ETF? Why or why not?

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Post by livesoft » Mon Sep 19, 2011 11:31 am

I haven't looked at EEMS since I already own EWX and DGS. I will have to take a look if I ever need to tax-loss harvest.
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Post by ftobin » Mon Sep 19, 2011 11:52 am

EEMS follows an MSCI index -- that's a point in its favor, as their indexes seem to be constructed better than other providers.

It's a very illiquid ETF. Someone blew through the market about 30% late Friday. I would be very cautious about making trades in it unless you know how to minimize your market impact.

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Post by grabiner » Mon Sep 19, 2011 7:48 pm

Checking portfolios, EEMS looks similar to EWX, which tracks the same market segment. (Data from Morningstar)

Median market cap: $820M for EEMS, $904M for EWX
Expense ratio: 0.69% for EEMS, 0.65% for EWX
EEMS includes South Korea, while EWX doesn't.

If nothing else, EEMS/EWX make a natural pair for tax loss harvesting.

I would prefer EWX in a taxable account for now, despite its recent capital gains. If EWX distributes a capital gain this year, the gain should be mostly long-term; if EEMS distributes a capital gain (and new ETFs often do), the gain will be short-term.

And with a very low average volume, I would expect more expensive trading and higher bid/ask spreads. If you do buy EEMS, you'll probably need to place a limit order at the ask, as there aren't many traders waiting to take an inside-the-spread order.
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Post by Hedgy » Tue Sep 20, 2011 8:14 am

grabiner wrote:Checking portfolios, EEMS looks similar to EWX, which tracks the same market segment. (Data from Morningstar)

Median market cap: $820M for EEMS, $904M for EWX...


Thanks for the info. I wasn't aware of EWX, and it's good to know about.

However, Morningstar appears to have bad data.
According to SPDR (provider of EWX), median market cap is $724M as of 9/16/11.
According to ishares (provider of EEMS), median market cap is $408M. I can't get their fact sheet to open right now, but I checked this yesterday.

So EEMS does, once again, seem to provide a much higher size loading than EWX.

Does this change your thinking?

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Post by HongKonger » Tue Sep 20, 2011 12:08 pm

Not sure what your definition if EM is (plenty of funds seem to count quite developed Asian markets as emerging including EEMS it would appear) but iShares have an MSCI Asia Apex (ex Japan) small cap that has similar countries (South Korea, Hong Kong, Taiwan, China and Indonesia).

Im still debating adding non Asian EMs right now, but noting there are a few planned to launch soon, I will be watching for now.

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Post by grap0013 » Tue Sep 20, 2011 4:59 pm

Hedgy,

Thanks for bringing this ETF up. I heard about it a few months ago and then forgot to check it out once it went live.

It already has 63 million in assets and it's barely a month old. I don't think bid/ask spreads will be a problem for too much longer.

Now we have to choose from DGS, EWX, and EEMS. I think DGS is the way to go in tax deferred. I think their dividend sort gives it a little value tilt and I'm not crazy about EWX's tracking error. About 3% annualized thus far (brutal) for EWX vs. DGS about 1.3% annualized.

Taxable is another animal. DGS's larger dividend gives it some extra tax drag, but I like the value tilt. I have some losses on EWX and don't know which is better to TLH into between DGS and EEMS.
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Post by grap0013 » Tue Sep 20, 2011 5:03 pm

Also, does anyone know why the larger dicrepancy between EWX's dividend yield and the index's? EWX's P/B looks pretty valuey so I'd expect a larger dividend. It looks like it has a value tilt, but it's excluding larger dividend payers while trying to be in small blend catergory. Huh?

https://www.spdrs.com/product/fund.seam?ticker=ewx
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Post by grabiner » Tue Sep 20, 2011 7:11 pm

Hedgy wrote:
grabiner wrote:Checking portfolios, EEMS looks similar to EWX, which tracks the same market segment. (Data from Morningstar)

Median market cap: $820M for EEMS, $904M for EWX...


Thanks for the info. I wasn't aware of EWX, and it's good to know about.

However, Morningstar appears to have bad data.
According to SPDR (provider of EWX), median market cap is $724M as of 9/16/11.
According to ishares (provider of EEMS), median market cap is $408M. I can't get their fact sheet to open right now, but I checked this yesterday.

So EEMS does, once again, seem to provide a much higher size loading than EWX.


Is the EWX number a median? I can't find a median there on the page The EWX page says that the weighted average market cap of the fund is $995M as of 9/19 (it is higher as of 6/30 because the markets fell), and the EEMS fact sheet says that the weighted average market cap is $906M as of 8/31. This difference is consistent with the Morningstar data.

I'll make a separate post on the advantages of EEMS even if they have the same cap range.
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Advantages of EEMS over EWX

Post by grabiner » Tue Sep 20, 2011 7:21 pm

The EEMS prospectus says that the MSCI index is "the bottom 14% of companies in emerging market countries, as measured by market capitalizations." The EWX prospectus says that the S&P index is "the S&P Emerging Markets Under USD2 Billion index".

This makes EEMS a more balanced index by country; its country weights would be proportional to the country market capitalizations if the index were stable. In contrast, EWX is overweighted in countries in which the overall cap range is lower. EWX is more than 30% in Taiwan, which is only 20% of EEMS (24% excluding South Korea, which EWX does not hold).

For Vanguard investors, EEMS is more natural because it is the complement to Vanguard's Emerging Markets Index. It's also probably a better-designed index by country weights.

While I could switch now from EWX to EEMS (I have a small net capital loss), I don't think I want to do it now for tax reasons. I will look at the decision again in December after EEMS has paid out its first distributions. (Also, if I sell EWX, I want to sell after it pays the dividend, because there is a very large foreign tax credit on that dividend but I can still deduct the dividend as a capital loss after selling.)
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Post by grabiner » Tue Sep 20, 2011 7:54 pm

I added EEMS to the International Small-Cap page on the wiki which compares the various small-cap funds. The data on EEMS will be out of sync with the data on other funds until the page gets its annual update on December 31.
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Post by Noobvestor » Tue Sep 20, 2011 10:44 pm

grabiner wrote:I added EEMS to the International Small-Cap page on the wiki which compares the various small-cap funds. The data on EEMS will be out of sync with the data on other funds until the page gets its annual update on December 31.


Nice - and thanks for the link - I didn't realize the Wiki had sections of that sort for some reason (though I've been through it more times than I can count) so cheers for letting me know, too :)
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Post by DaveS » Tue Sep 20, 2011 11:09 pm

Thanks for bringing this ETF to our attention. Most of the funds/etf's in this area have one or two drawbacks. EWX has really high turnover, like 80%, DGS has that lousy weighting in favor of dividends - as contrasted with book to value. VSS which I own, is very broad and low cost. As has been pointed out, it's not just an emerging markets fund. My guess is the new fund will have some defect like those mentioned above, but only time will tell. Maybe you bank the money till more is known, or go VSS for a while. Dave

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Post by grabiner » Wed Sep 21, 2011 6:39 pm

DaveS wrote:Thanks for bringing this ETF to our attention. Most of the funds/etf's in this area have one or two drawbacks. EWX has really high turnover, like 80%


It's 85% according to the current prospectus, and I doubt that the index has that much turnover. GWX, tracking the similar index in developed markets, has only 17% turnover, and even DGS, which should have higher turnover due to dividend weighting, has 35%.

I would guess that the 85% is an anomaly due to index changes; 20% turnover is normal for a small-cap index. In any case, EWX didn't distribute the huge amount of capital gains that would normaly come with an 85% turnover.
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Re: Emerging Markets Small Cap ETF (EEMS)

Post by RaleighStClaire » Tue Aug 21, 2012 9:17 am

I'm doing a little rebalancing and want to move into the EM small/value space and it seems like the contest is still between EEMS, EWX and DGS. Has anything changed in the last year or so?

From my current screen I see these stats:

Code: Select all

        AMC      P/B
EEMS    695       .92
EWX     828      1.00
DGS     1163     1.04


Considering they have very similar ERs I tend to favor EEMS based on this data as it's more small and more valuey than the others (what I'm going for). I know the trading volume is terrible for EEMS but I'd be using limit orders so that's not much of an issue imo.
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Re: Emerging Markets Small Cap ETF (EEMS)

Post by ftobin » Tue Aug 21, 2012 11:52 am

RaleighStClaire wrote:Considering they have very similar ERs I tend to favor EEMS based on this data as it's more small and more valuey than the others (what I'm going for). I know the trading volume is terrible for EEMS but I'd be using limit orders so that's not much of an issue imo.

Note that EEMS is an emerging-market small-cap fund, with no value bend.

EEMS's spreads are reasonable, on the same order of magnitude as VSS, but only about $8000 (200 shares) is available at the inside.

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Re: Emerging Markets Small Cap ETF (EEMS)

Post by RaleighStClaire » Tue Aug 21, 2012 12:19 pm

ftobin wrote:
RaleighStClaire wrote:Considering they have very similar ERs I tend to favor EEMS based on this data as it's more small and more valuey than the others (what I'm going for). I know the trading volume is terrible for EEMS but I'd be using limit orders so that's not much of an issue imo.

Note that EEMS is an emerging-market small-cap fund, with no value bend.

EEMS's spreads are reasonable, on the same order of magnitude as VSS, but only about $8000 (200 shares) is available at the inside.


It's not defined as a value fund but it is clearly more value tilted compared to other EM small cap funds
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Low turnover, but small size concerns

Post by grabiner » Tue Aug 21, 2012 9:10 pm

grabiner wrote:
DaveS wrote:Thanks for bringing this ETF to our attention. Most of the funds/etf's in this area have one or two drawbacks. EWX has really high turnover, like 80%


It's 85% according to the current prospectus, and I doubt that the index has that much turnover. GWX, tracking the similar index in developed markets, has only 17% turnover, and even DGS, which should have higher turnover due to dividend weighting, has 35%.

I would guess that the 85% is an anomaly due to index changes; 20% turnover is normal for a small-cap index. In any case, EWX didn't distribute the huge amount of capital gains that would normaly come with an 85% turnover.


And according to the semi-annual report, EEMS had 9% turnover from 8/31/11-2/29/12, which would be consistent with an 18% annual turnover rate.

However, there is another potential problem with EEMS: the fund is effectively a closed-end fund, not an ETF, because it is so small that creation and redemption are impractical. A Creation Unit is 200,000 shares, which is exactly the total number of shares outstanding, and which is 110 days of volume.

Thus an institutional investor who wants to create more shares would have to create a Creation Unit and make all of the sales for months, taking a considerable risk. And it is impossible for EEMS to get the tax benefit of redemption at its current size, as an institutional investor would need to buy up the entire holding to do an in-kind redemption.
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Re: Low turnover, but small size concerns

Post by RaleighStClaire » Wed Aug 22, 2012 7:11 am

grabiner wrote:
grabiner wrote:
DaveS wrote:Thanks for bringing this ETF to our attention. Most of the funds/etf's in this area have one or two drawbacks. EWX has really high turnover, like 80%


It's 85% according to the current prospectus, and I doubt that the index has that much turnover. GWX, tracking the similar index in developed markets, has only 17% turnover, and even DGS, which should have higher turnover due to dividend weighting, has 35%.

I would guess that the 85% is an anomaly due to index changes; 20% turnover is normal for a small-cap index. In any case, EWX didn't distribute the huge amount of capital gains that would normaly come with an 85% turnover.


And according to the semi-annual report, EEMS had 9% turnover from 8/31/11-2/29/12, which would be consistent with an 18% annual turnover rate.

However, there is another potential problem with EEMS: the fund is effectively a closed-end fund, not an ETF, because it is so small that creation and redemption are impractical. A Creation Unit is 200,000 shares, which is exactly the total number of shares outstanding, and which is 110 days of volume.

Thus an institutional investor who wants to create more shares would have to create a Creation Unit and make all of the sales for months, taking a considerable risk. And it is impossible for EEMS to get the tax benefit of redemption at its current size, as an institutional investor would need to buy up the entire holding to do an in-kind redemption.


I don't mean to troll or anything but how is this relevant to me? Let's assume I'm buying 1,000 shares on a limit order at or close to the ask price.
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Re: Low turnover, but small size concerns

Post by ftobin » Wed Aug 22, 2012 8:05 am

RaleighStClaire wrote:I don't mean to troll or anything but how is this relevant to me? Let's assume I'm buying 1,000 shares on a limit order at or close to the ask price.

It means the stock is destined to be illiquid for some time, notably of importance when you want to sell. Without actual creation and redemption going on, you'll be paying quite a premium on your purchase, and won't be able to trade near NAV like you could on, say, VWO.

If you wanted to buy 1000 shares, you will have to stomp through several levels to pick up 1000 shares. As I noted above, midday yesterday only 200 shares were offered at the inside. I didn't check the depth of the book, but I can imagine you'd need to pay 2-3% above NAV to get all 1000 shares. (And you'd subsequently own .2% of outstanding shares.)

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Re: Emerging Markets Small Cap ETF (EEMS)

Post by livesoft » Wed Aug 22, 2012 8:15 am

Let me be more explicit about illiquid ETFs. Suppose you want to buy 1000 shares of EEMS at the limit price of 44 which might be the current ask. The average daily volume appears to be less than 2000 shares.

First, there might not be 1000 shares offered for sale at the time you place your order. Second, there may be only 100 shares for sale at the current ask of 44 and the next offer may be 900 shares at $54 a share. If you place a market order to buy, you will get pay 100 * $44 + 900 * $54 for your 1000 shares. Of course, a computer program may jump in and see your market order and get to sell you those 900 shares at $53.99 (can you say high-frequency trading!).

If you place a limit order at $44 a share, you may end up only buying 100 shares because no one else wants to sell shares at only $44 a share. Since there are not many sellers (the ETF is illiquid), you are kinda stuck.

Furthermore, suppose something happens in your life or stock market and you want to unload the shares you have purchased over the years. With very liquid and high volume ETFs, you can sell with a market order and not worry about the price you sell at too much. With something like EEMS, you wll get taken to the cleaner unless you unwind your position over a period of time.

Think about other things that are illiquid that trade infrequently such as Rembrandt paintings.
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Re: Emerging Markets Small Cap ETF (EEMS)

Post by ftobin » Wed Aug 22, 2012 8:41 am

Just an update: looking at the ECN feeds for EEMS, you would indeed have to pay about $1 above the current ask to pick up 1000 shares. That transates into a $1/$44 = 2.2% premium.

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Re: Emerging Markets Small Cap ETF (EEMS)

Post by RaleighStClaire » Wed Aug 22, 2012 9:31 am

livesoft: what you say about market orders is semi-accurate but you are ignoring the fact that a lot of size is hidden by the market makers for iShares. There may be 100 shares at 44 but there are almost definitely thousands upon thousands of shares available slightly above that. I've worked with market makers like Guggenheim and PIMCO (for ETFs) and even those small potatoes offer tens of thousands of shares slightly above the ask. Yes, you run into a risk that the iShares market maker didn't do his job correct and yes it's technically possible to buy 100 at 44 and 900 at 54, but that is extremely unlikely and iShares probably isn't going to let that happen. This all is irrelevant anyways since I mentioned buying on limits. Which I did yesterday, by the way, at 43.90, when the bid was 43.82 and the ask was 43.98. It took about 2 minutes to get a fill.

Anyways, this is a long-term hold so I was mainly interested in what people thought of the actual fund compared to other similar instruments like DGS, DEMSX (I can't buy it but I still like comparing to DFA) or any other EM Small position.
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Re: Low turnover, but small size concerns

Post by grabiner » Wed Aug 22, 2012 6:41 pm

RaleighStClaire wrote:
grabiner wrote:However, there is another potential problem with EEMS: the fund is effectively a closed-end fund, not an ETF, because it is so small that creation and redemption are impractical. A Creation Unit is 200,000 shares, which is exactly the total number of shares outstanding, and which is 110 days of volume.

Thus an institutional investor who wants to create more shares would have to create a Creation Unit and make all of the sales for months, taking a considerable risk. And it is impossible for EEMS to get the tax benefit of redemption at its current size, as an institutional investor would need to buy up the entire holding to do an in-kind redemption.


I don't mean to troll or anything but how is this relevant to me? Let's assume I'm buying 1,000 shares on a limit order at or close to the ask price.


There are probably market makers who are willing to buy and sell more shares than are displayed, but for a low-volume ETF, the market makers will not get as close to the net asset value because there is more risk involved. If a market maker buys and sells shares, he will accumulate them for months before he is long or short enough shares to make a Creation Unit and get out of the position. In addition, with nobody holding enough shares to make a Creation Unit, the arbitrage process which keeps the ETF price close to the fair value cannot function.

And even if the ETF is fairly priced (which seems reasonable in an efficient market), it is likely to become tax-inefficient. Small-cap stocks which rise in price become large-cap stocks and leave the index, forcing ETFs to sell them for a capital gain. Normally, ETFs can compensate because they redeem shares in kind, giving away their lowest-basis shares to reduce unrealized gains. However, if there are no in-kind redemptions, this process will not work, and investors will pay tax on all the capital gains realized by the ETF. EWX, the established emerging markets small-cap ETF, was tax-inefficient, while EEMS is still an unknown.
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Re: Emerging Markets Small Cap ETF (EEMS)

Post by grap0013 » Wed Aug 22, 2012 9:24 pm

RaleighStClaire wrote:I'm doing a little rebalancing and want to move into the EM small/value space and it seems like the contest is still between EEMS, EWX and DGS. Has anything changed in the last year or so?

From my current screen I see these stats:

Code: Select all

        AMC      P/B
EEMS    695       .92
EWX     828      1.00
DGS     1163     1.04


Considering they have very similar ERs I tend to favor EEMS based on this data as it's more small and more valuey than the others (what I'm going for). I know the trading volume is terrible for EEMS but I'd be using limit orders so that's not much of an issue imo.


I'll try to talk about something other than bid/ask spreads because I completely agree with you that it is a none issue by using a limit order. Those P/B are all so close it could just be noise in the numbers. I'd consider them equal.

EWX: Tracking error to its index is large. Don't buy.
EEMS: Still pretty new plus you'd have to check in occasionally to make sure it still has a value tilt. I'm a little suspicious of a "blend" fund with a value tilt. Not sure of tracking error.
DGS: You know what you're getting with it. Tracking error is solid against its index. Dividend screened so you know you are getting a value tilt so you don't have to monitor if it is still value tilted.
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Re: Emerging Markets Small Cap ETF (EEMS)

Post by ftobin » Wed Aug 22, 2012 9:43 pm

grap0013 wrote:
RaleighStClaire wrote:I'll try to talk about something other than bid/ask spreads because I completely agree with you that it is a none issue by using a limit order.

For clarification, I've always assumed one would use a limit order. My point is that if you aren't wiling to be aggressive by pricing through the market a good deal, you simply won't find someone willing to sell at a conservative limit price.

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Re: Emerging Markets Small Cap ETF (EEMS)

Post by grap0013 » Thu Aug 23, 2012 4:00 pm

ftobin wrote:
grap0013 wrote:
RaleighStClaire wrote:I'll try to talk about something other than bid/ask spreads because I completely agree with you that it is a none issue by using a limit order.

For clarification, I've always assumed one would use a limit order. My point is that if you aren't wiling to be aggressive by pricing through the market a good deal, you simply won't find someone willing to sell at a conservative limit price.


I'm asking this as a legitimate question, but have you actually tried to trade a thinly traded ETF with a limit order? I have never had a bad experience trading PRFZ, PXSV, PDN, RZV, or EEMS in the past. Put in a limit order a few cents above the ask and it has always filled just a little under it. Takes me about 30 seconds to trade one of these and yeah I eat the spread, but I do it during the middle of the day and the most I'm out is usually 0.2% or 0.3%. Unless you are following a RBD strategy and regularly trading in and out of these, I don't see any problems.
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Re: Emerging Markets Small Cap ETF (EEMS)

Post by livesoft » Thu Aug 23, 2012 4:10 pm

Are you buying 5000 shares with your limit order? If not, what number of shares do you typical have per order?
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Re: Emerging Markets Small Cap ETF (EEMS)

Post by grap0013 » Thu Aug 23, 2012 4:16 pm

livesoft wrote:Are you buying 5000 shares with your limit order? If not, what number of shares do you typical have per order?


Maybe 5K worth on average. However many shares that gets me. Plus VBS lets you check that little handy all or none box so you don't fill a bunch of little orders.
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Re: Emerging Markets Small Cap ETF (EEMS)

Post by ftobin » Thu Aug 23, 2012 4:35 pm

grap0013 wrote:I'm asking this as a legitimate question, but have you actually tried to trade a thinly traded ETF with a limit order? I have never had a bad experience trading PRFZ, PXSV, PDN, RZV, or EEMS in the past. Put in a limit order a few cents above the ask and it has always filled just a little under it. Takes me about 30 seconds to trade one of these and yeah I eat the spread, but I do it during the middle of the day and the most I'm out is usually 0.2% or 0.3%. Unless you are following a RBD strategy and regularly trading in and out of these, I don't see any problems.

The market maker handling the order is filling you then, anticipating reversion after eating away a few levels. I sometimes forget that you'd be using a broker who can fill you out their own inventory -- in my business there is no-one between us and the ECN.

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Re: Emerging Markets Small Cap ETF (EEMS)

Post by grabiner » Thu Aug 23, 2012 8:21 pm

grap0013 wrote:
livesoft wrote:Are you buying 5000 shares with your limit order? If not, what number of shares do you typical have per order?


Maybe 5K worth on average. However many shares that gets me. Plus VBS lets you check that little handy all or none box so you don't fill a bunch of little orders.


That's 100 shares, so you shouldn't eat any more than the spread on a limit order, and the spread is small enough that it is probably worth placing your limit order at the ask to get immediate execution.
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Re: Emerging Markets Small Cap ETF (EEMS)

Post by Brian2d » Tue Dec 24, 2013 6:59 pm

Apologies for resurrecting an old thread here.

2 years later, still seems like EEMS still has only about $33 million in net assets, vs. over $700 million for EWX.

It seems to me like EEMS would otherwise be the better choice but the lack of assets has me wondering about bid ask spreads (then again, if I hold for a long time would I even care?)

Any thoughts on EEMS vs EWX?

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Re: Emerging Markets Small Cap ETF (EEMS)

Post by 2beachcombers » Thu Dec 26, 2013 11:38 am

I switched last year to VSS +Fpmax(20bp) and put in deferred to avoid NQDIs. :happy

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Re: Emerging Markets Small Cap ETF (EEMS)

Post by grabiner » Thu Dec 26, 2013 1:24 pm

Brian2d wrote:Apologies for resurrecting an old thread here.

2 years later, still seems like EEMS still has only about $33 million in net assets, vs. over $700 million for EWX.

It seems to me like EEMS would otherwise be the better choice but the lack of assets has me wondering about bid ask spreads (then again, if I hold for a long time would I even care?)

Any thoughts on EEMS vs EWX?


EWX, which started in 2008m made significant capital-gains distributions in 2009, 2010, and 2011, including some short-term distibutions which could not be offset by capital losses elsewhere. Most stock ETFs have been able to avoid capital gains except for just after when they started. When EWX distributed them (and so did the developed markets small-cap SPDR ETF, GWX), I concluded that EWX is poor for a taxable account, and switched to EEMS.

Despite the small asset size, EEMS is now in its third year and has never distributed a capital gain, so it looks like the better choice for a taxable account, The low volume and large spreads aren't much of a concern for a buy-and-hold investor, although they do increase the cost of tax loss harvesting; if you sell EEMS to buy EWX, and then do the reverse 31 days later, you may lose more than half a percent to spreads on the round trip.
David Grabiner

2beachcombers
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Location: Savannah

Re: Emerging Markets Small Cap ETF (EEMS)

Post by 2beachcombers » Thu Dec 26, 2013 2:19 pm

Since I do not want taxable income(especially NQDI), I have moved int small and Emerging what ever to deferred.
Last year I was hit with 51% nonquals in VSS and 43% in VWO
jerry

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