Key Morningstar Metrics for iShares ESG Aware MSCI Emerging Markets Index ETF
- Morningstar Category: Emerging Markets Equity
- Morningstar Medalist Rating: Bronze
- Morningstar Rating: ★★★
IShares ESG Aware MSCI Emerging Markets ETF XSEM captures most of the emerging market universe despite some mild environmental, social, and governance tilts. However, indexing is a blunt tool for managing the geopolitical risks inherent to emerging markets.
This fund tracks the MSCI Emerging Markets Extended ESG Focus Index, which uses an optimizer to maximize its exposure to stocks with high ESG ratings while keeping its expected tracking error to the MSCI Emerging Markets Index at around 1%. This is a tight constraint, so the fund’s risk profile and long-term performance have closely matched those of the parent index. To further tether the portfolio to the parent index, the optimizer keeps a lid on the fund’s active bets at the sector, country, and individual stock levels. As a result, the fund may still hold sizable stakes in sectors or companies that some ESG investors would rather avoid.
The resulting portfolio features about one quarter of the stocks in the parent index, but with a similar composition. Its sector exposures did not stray far from its average Morningstar Category peer, save for a slight overweighting in financials. Its country weightings were similar to those of both the index and the category average, with China receiving the highest weighting at just under 30% of its portfolio.
In general, emerging markets face greater geopolitical risks than their developed counterparts. For instance, MSCI had to remove Russian stocks from the fund’s target index in February 2022, and the fund marked its Russian stocks’ values down to zero. The impact on performance was limited by the fund’s single-digit allocation to Russian stocks at the end of January 2022. The fund also cannot avoid many of the state-owned behemoths prevalent in emerging markets, and they may not always prioritize the interests of public shareholders.
Its low annual fee of 0.25% helps preserve the advantage of its broad and diversified portfolio over category peers. The fund outperformed the category average by 92 basis points annualized from its 2016 inception through December 2025.
iShares ESG Aware MSCI Emerging Markets Index ETF: Performance Highlights
The fund narrowly beat the category average by 92 basis points annualized from its 2016 inception through December 2025. The fund can be just as volatile as its average peer at times, but its risk-adjusted return, as measured by Sharpe ratio, is comparable to the category average.
Country and regional exposure have influenced the fund’s performance. The fund’s heavy stake in emerging Asian stocks boosted its returns in recent years, particularly its allocation to Taiwan. Likewise, the fund underperformed in 2023 when Asian markets languished. In 2025, the fund’s inclusion of South Korean stocks finally paid off as that market had one of its best years in recent history, reversing a slump. The fund ended up outpacing the category average by over 5 percentage points in 2025.
Geographical tilts influence category-relative performance in the short term, but the fund’s broad scope should limit these deviations. In the long run, the fund’s returns should stay close to category peers, and its below-average fee and low cash drag offer an advantage.
