International ETFs: iShares EAFE ETF vs Vanguard Emerging Markets ETF

The iShares Core MSCI EAFE ETF (NYSEMKT:IEFA) provides broad exposure to developed international markets, while the Vanguard FTSE Emerging Markets ETF (NYSEMKT:VWO) focuses on higher-volatility emerging markets such as China, Taiwan, and Brazil.

Investors seeking international diversification must choose between the established stability of developed regions or the growth potential of emerging nations. This comparison explores how these two massive funds differ in cost, sector concentration, and historical performance to help determine which fits a specific portfolio strategy.

Snapshot (cost & size)

Beta measures price volatility relative to the S&P 500; beta is calculated from five-year monthly returns. The 1-yr return represents total return over the trailing 12 months. Dividend yield is the trailing-12-month distribution yield.

The Vanguard fund is slightly more affordable, with an expense ratio of 0.06%, while the iShares fund has an expense ratio of 0.07%. However, the iShares fund offers a higher payout, showing a yield gap of 1.07 percentage points over its Vanguard counterpart.

Performance & risk comparison

What's inside

iShares Core MSCI EAFE ETF manages 2,619 holdings and tracks developed markets across Europe, Australasia, and the Far East. Its sector allocation is led by financial services at 25%, industrials at 19%, and technology at 14%. Top holdings include ASML Holding (NASDAQ:ASML) at 2.71%, HSBC Holdings (LSE:HSBA) at 1.30%, and Roche Holding at 1.16%. Launched in 2012. iShares Core MSCI EAFE ETF has paid $3.29 per share over the trailing 12 months, which, at its recent ~$96.73 share price, yields 3.4%.

Vanguard FTSE Emerging Markets ETF is more concentrated in technology at 32%, followed by financial services at 17%. The portfolio includes 5,942 holdings and tracks the FTSE Emerging Markets All Cap China A Inclusion Index. Its largest positions include Taiwan Semiconductor Manufacturing (NYSE:TSM) at 14.69%, Tencent Holdings at 2.75%, and Alibaba Group Holding (NYSE:BABA) at 2.26%. Launched in 2005. Vanguard FTSE Emerging Markets ETF has paid $1.38 per share over the trailing 12 months, which, at its recent ~$59.49 share price, yields 2.3%.

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Which looks like the better buy

The iShares Core MSCI EAFE ETF (IEFA) and the Vanguard FTSE Emerging Markets ETF (VWO) are both international exchange-traded funds (ETFs) that focus on stocks outside the U.S. However, these funds are by no means duplicates of one another. They offer very different holdings, each designed to provide a different form of international exposure.

Let’s begin with IEFA. This fund has over 2,600 stock holdings. Those holdings span several continents, with stocks based in Europe, Asia, and Australia. Overall, about 62% of its holdings are in Europe, with 36% in the Asia Pacific. In terms of countries, Japan is the largest, with 25% of the fund’s exposure there, while about 14% comes from the U.K, and another 9% is from Swiss companies. Turning to performance, the fund has generated a total return of 146% over the last 10 years, equating to a compound annual growth rate (CAGR) of 9.4%. This total return includes the fund’s dividend yield, currently around 3.4%. Lastly, the fund’s 0.07% expense ratio is very affordable.

Then, there’s VWO. This fund takes a very different approach. Rather than focusing mostly on European and Japanese stocks, VWO is an emerging market fund with heavy exposure to Taiwan (33% of holdings), China (22%), and India (16%). As a result, the vast majority of the fund’s regional exposure is in Asia Pacific (75%), with much smaller portions in Europe (12%) and North, Central, and South America (8%). As for performance, VWO has generated a total return of 109% over the last 10 years, with a CAGR of 7.7%. That falls well short of the S&P 500, which has generated a total return of 304% over the same period, with a CAGR of 15%. The fund’s total return includes dividends, which currently yield about 2.3%. Finally, VWO’s expense ratio of 0.06% is quite low.

In summary, IEFA is a fund designed for those seeking exposure to international stocks primarily in developed markets in Europe and Japan. VWO, on the other hand, provides exposure to stocks from emerging markets such as Taiwan, China, and India. Stocks from these emerging markets are often more volatile, for a variety of reasons. IEFA, with its higher dividend yield and better long-term performance, will be a wise choice for most investors seeking international stock exposure for their portfolio.

HSBC Holdings is an advertising partner of Motley Fool Money. Jake Lerch has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends ASML, Taiwan Semiconductor Manufacturing, Tencent, and Vanguard FTSE Emerging Markets ETF. The Motley Fool recommends Alibaba Group, HSBC Holdings, and Roche Holding AG. The Motley Fool has a disclosure policy.