Diversification, or the Illusion Thereof

by

The current enthusiasm for ‘international exposure’ – a phrase redolent of boardrooms and the faint scent of desperation – has given rise to a predictable scramble for exchange-traded funds. Two names recur with tiresome regularity: the iShares MSCI Emerging Markets ETF (EEM) and the iShares Core MSCI EAFE ETF (IEFA). The former, one gathers, is intended to capture the ‘growth potential’ of less-regulated climes. The latter, a rather more sensible proposition, addresses the developed world, excluding, of course, our own and that of our Canadian cousins. A distinction, though not necessarily a meaningful one.

Both funds offer the comforting illusion of diversification. One merely trades risk profiles – the heady, unpredictable growth of the emerging markets versus the rather more pedestrian, yet marginally more reliable, returns of the established economies. The choice, naturally, depends on one’s appetite for anxiety and the prevailing narrative concocted by the investment bank du jour.

A Matter of Pennies (and Billions)

Metric IEFA EEM
Issuer iShares iShares
Expense Ratio 0.07% 0.72%
1-yr Return (as of 2026-01-22) 31.8% 33.3%
Dividend Yield 3.5% 2.1%
Beta 0.73 0.74
AUM $170.4 billion $25.1 billion

The expense ratio, a negligible detail to the unsophisticated, is, in fact, a rather blatant demonstration of how the industry extracts its pound of flesh. IEFA’s 0.07% versus EEM’s 0.72% is not, as the marketing materials would suggest, a trifling difference. It is a measure of the parasitic nature of the financial world. The dividend yield, likewise, offers a small consolation, though one suspects it is largely offset by inflation and the general decline of civilization.

Performance and the Illusion of Control

Metric IEFA EEM
Max Drawdown (5 y) -30.41% -39.82%
Growth of $1,000 over 5 years $1,307 $1,044

The charts and graphs, naturally, are presented as evidence of competence. But one is forced to concede that even the most inept fund manager will occasionally stumble upon a positive return. The ‘growth of $1,000’ over five years is, frankly, a rather pathetic metric, barely keeping pace with the relentless erosion of purchasing power.

Inside the Machine

EEM, one discovers, is heavily weighted towards technology and financial services in Asia, with Taiwan Semiconductor Manufacturing, Tencent, and Samsung dominating the portfolio. A concentration of risk, naturally, disguised as ‘exposure to high-growth sectors.’ IEFA, by contrast, is a slightly more diversified affair, with financial services, industrials, and healthcare taking the lead. ASML, Roche, and HSBC – the pillars of the established order. A comforting, if uninspiring, sight.

The sheer number of holdings – 1,214 for EEM, 2,591 for IEFA – is presented as evidence of diversification. But one suspects that a significant portion of these holdings are, in fact, indistinguishable from one another, mere cogs in the global economic machine.

The Bottom Line (if one exists)

ETFs, one must concede, offer a convenient means of shuffling capital around. IEFA and EEM, in particular, allow investors to indulge in the fantasy of ‘international exposure’ without the inconvenience of actually understanding the underlying economies. But the differences between the two funds are, ultimately, marginal. IEFA is a low-cost index fund for the developed world. EEM is a slightly more expensive, slightly more volatile, fund for the emerging markets. The choice, therefore, is not a matter of investment strategy, but of temperament. And, perhaps, of one’s tolerance for disappointment.

The entire exercise, one suspects, is a distraction. A means of diverting attention from the fundamental instability of the global financial system. But then, what else is new?

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2026-01-25 22:22