Should you pick DEGIRO’s commission free iShares Emerging Markets ETF?

Editor’s Note: This article was written when the iShares Emerging Markets ETF (ISIN IE00B0M63177) had a TER of 0.75%. That TER has now changed to 0.18%. This means that I now consider this to be a reasonable choice for an emerging markets ETF.

I will keep the original article below because it is shares some practices you should use to audit any ETF irrespectively of its trading fees.

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You can trade a few ETFs in DEGIRO without paying transaction fees. One of those ETFs is the iShares Emerging Markets ETF:

  • ISIN: IE00B0M63177
  • TER: 0.75%
  • Fund Size: 4 678 m EUR
  • Distributing fund

iShares has an alternative offering (for which you have to pay transaction fees in DEGIRO), the iShares Core MSCI Emerging Markets IMI ETF:

  • ISIN: IE00BD45KH83
  • TER 0:18%
  • Fund Size: 228m EUR
  • Distributing fund

Note: In an earlier post I detail the differences between these ETFs.

Given the difference in transaction fees and TER which ETF is more beneficial in the long term? Is the commission free iShares Emerging Markets ETF worth it?

This is one of those questions that is quickly answered with a simple Excel simulation. Here is my methodology:

  • Goal: Determine the ETF which will result in the biggest portfolio growth when transaction fees and TER are taken into account?
  • I assume a 3% constant yearly portfolio growth. In reality growth changes all the time and may have different values. But for the purposes of this demonstration we can live with constant growth.
  • I assume the same portfolio growth for both ETFs. In reality these ETFs will have a slightly different (but very similar) performance since they hold different companies and track different index.
  • I assume 0 EUR in dividend processing fees for simplicity reasons. The impact to portfolio growth would have been similar in both cases so I excluded it.
  • I assume the same amount is invested every month is 1000 €.
  • I assume the investment period is 20 years
  • I assume the transaction fees are 2 € + 0.038% for the ETF that isn’t commission free
  • I didn’t add exchange connectivity fees (0.25% of portfolio value, maximum 2.5 €) because it would affect both portfolios the same way.
  • I didn’t consider any costs with taxes

Given those assumptions we observe that the iShares MSCI Emerging Markets ETF portfolio would grow to 304,909.60 € while the iShares Core MSCI Emerging Markets IMI ETF would grow to 324,563.95 € – a ~6% difference between both outcomes.

For this example, even though the iShares MSCI Emerging Markets ETF had commission free transactions – which lead to all of the money being allocated to the ETF – it was not enough to compensate for its high TER – which is effectively a fee on your total portfolio.

In this scenario the iShares MSCI Core Emerging Markets IMI ETF is more beneficial.

Portfolio growth with 1000 € monthly investment

It is important to note that the result of this simulation changes if the amounts invested are lower.

This is a contrived example but if you were to invest 30 € a month the iShares MSCI Emerging Markets ETF portfolio would grow to 9,147.29 € while the iShares Core MSCI Emerging Markets IMI ETF would grow to 9,105.75 € – a ~0.4% difference between both outcomes.

Portfolio growth with 30 € monthly investment

In this second scenario the iShares MSCI Emerging Markets ETF is more beneficial.

Excel is a great tool to evaluate the impact of TER and transaction fees. You may find a copy of the spreadsheet I used here.