What's going on with iShares BEMB ETF? (Broad emerging market bond ETF)

[Trance]

iShares launched a new emerging market bond fund in 2023 called the Broad USD Emerging Markets Bond ETF: BEMB. It's supposed to be a combination of two other ETF's they offer: EMB and CEMB. Essentially allowing investors to purchase an ETF with both corporate and sovereign debt at once. And at a lower expense ratio: 0.18% compared to EMB's 0.39% and CEMB's 0.50%

But what's bizare is that this ETF has less holding than either of the other two

• EMB - 631 holdings

• CEMB - 1086 holdings

• BEMB - 296 holdings

Is this just because it's new and launched in Feburary 2023? Or am I missing something?

[alpenglow]

I haven't researched this ETF, but I'm going to guess that they are using a sampling method to approximate the combined indexes.

[nisiprius]

The prospectus for BEMB says:

BFA uses a representative sampling indexing strategy to manage the Fund.

However, the CEMB prospectus says the same thing. So that doesn't necessarily explain it.

[Geologist]

What are the net assets of each of these funds? If BEMB has lower net assets, it is likely to hold fewer holdings in its sampling.

[Trance]

What are the net assets of each of these funds? If BEMB has lower net assets, it is likely to hold fewer holdings in its sampling.

EMB - $14.7 billion
CEMB - $444.4 million
BEMB - $47.4 million

So that might explain it.

And yeah I'm not the biggest fan of sampling when it's this dramatic. Not too sure I want to add EM Bonds to my portfolio but was curious about this. I like seeing these new ETF's. I wonder why they didn't just make it comprised of EMB and CEMB. That would solve the low volume and AUM impact.

[Geologist]

What are the net assets of each of these funds? If BEMB has lower net assets, it is likely to hold fewer holdings in its sampling.

EMB - $14.7 billion
CEMB - $444.4 million
BEMB - $47.4 million

So that might explain it.

And yeah I'm not the biggest fan of sampling when it's this dramatic. Not too sure I want to add EM Bonds to my portfolio but was curious about this. I like seeing these new ETF's. I wonder why they didn't just make it comprised of EMB and CEMB. That would solve the low volume and AUM impact.

I believe there are legal limitations on having a fund of ETF's that are different from having a fund of mutual funds.

Edit: Here is a paragraph from Vanguard's prospectus for US Stock ETF's:

"A precautionary note to investment companies: Vanguard ETF Shares are issued by registered investment companies, and therefore the acquisition of such shares by other investment companies is subject to the restrictions of Section 12(d)(1) of the Investment Company Act of 1940. Vanguard has obtained an SEC exemptive order that allows registered investment companies to invest in the issuing funds beyond the limits of Section 12(d)(1), subject to certain terms and conditions, including the requirement to enter into a participation agreement with Vanguard."

I have no idea what Section 12(d)(1) describes and how easy or desirable it is to get an SEC exemptive order.

[Trance]

EMB - $14.7 billion
CEMB - $444.4 million
BEMB - $47.4 million

So that might explain it.

And yeah I'm not the biggest fan of sampling when it's this dramatic. Not too sure I want to add EM Bonds to my portfolio but was curious about this. I like seeing these new ETF's. I wonder why they didn't just make it comprised of EMB and CEMB. That would solve the low volume and AUM impact.

I believe there are legal limitations on having a fund of ETF's that are different from having a fund of mutual funds.

Edit: Here is a paragraph from Vanguard's prospectus for US Stock ETF's:

"A precautionary note to investment companies: Vanguard ETF Shares are issued by registered investment companies, and therefore the acquisition of such shares by other investment companies is subject to the restrictions of Section 12(d)(1) of the Investment Company Act of 1940. Vanguard has obtained an SEC exemptive order that allows registered investment companies to invest in the issuing funds beyond the limits of Section 12(d)(1), subject to certain terms and conditions, including the requirement to enter into a participation agreement with Vanguard."

I have no idea what Section 12(d)(1) describes and how easy or desirable it is to get an SEC exemptive order.

Does this exemption have a time limit? Because that would raise some concern if one is holding BNDW or others. Does this apply to target date funds? I might be misunderstanding it

[Geologist]

I believe there are legal limitations on having a fund of ETF's that are different from having a fund of mutual funds.

Edit: Here is a paragraph from Vanguard's prospectus for US Stock ETF's:

"A precautionary note to investment companies: Vanguard ETF Shares are issued by registered investment companies, and therefore the acquisition of such shares by other investment companies is subject to the restrictions of Section 12(d)(1) of the Investment Company Act of 1940. Vanguard has obtained an SEC exemptive order that allows registered investment companies to invest in the issuing funds beyond the limits of Section 12(d)(1), subject to certain terms and conditions, including the requirement to enter into a participation agreement with Vanguard."

I have no idea what Section 12(d)(1) describes and how easy or desirable it is to get an SEC exemptive order.

Does this exemption have a time limit? Because that would raise some concern if one is holding BNDW or others. Does this apply to target date funds? I might be misunderstanding it

I would not worry about whether or not the exemptive order has a time limit. Large financial institutions (Vanguard/Schwab/Fidelity, etc.) have teams of lawyers to handle compliance issues and if exemptive orders need renewal, they get it. Vanguard has had some funds of funds for more than 30 years and has had the necessary exemptive orders all that time. (Large investment companies have SEC exemptive orders for other aspects of their business; you should read the notes to fund financial statements.)