Want to Add Instant Diversification to Your Portfolio? Here's How VT and VWO Stack Up.

While Vanguard FTSE Emerging Markets ETF (NYSEMKT:VWO) provides concentrated exposure to developing economies, Vanguard Total World Stock ETF (NYSEMKT:VT) offers a more comprehensive global strategy including domestic and international stocks.

Investors choosing between these two Vanguard funds are essentially deciding between targeted growth potential in developing economies and broad-based global stability. While Vanguard FTSE Emerging Markets ETF focuses exclusively on nations such as China, Brazil, and Taiwan, Vanguard Total World Stock ETF covers nearly every investable market on the planet, including large caps within the United States.

Snapshot (cost & size)

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

These two institutional-scale funds are equally efficient from a cost perspective, as each carries a rock-bottom 0.06% expense ratio. However, income-focused investors may notice a difference in their historical payouts; Vanguard FTSE Emerging Markets ETF currently offers a more robust yield, resulting in a yield gap of 0.65 percentage points between the two.

Performance & risk comparison

What's inside

Vanguard Total World Stock ETF provides massive diversification with more than 10,000 holdings, aiming to mirror the FTSE Global All Cap Index, which spans businesses in both well-developed and rapidly expanding markets worldwide. Its portfolio leans heavily into technology at 30%, financial services at 16%, and industrials at 11%. Its largest positions include Nvidia (NASDAQ:NVDA) at 4.3%, Apple at 3.8%, and Microsoft at 3.1%. The fund was launched in 2008. Vanguard Total World Stock ETF has paid $2.89 per share over the trailing 12 months, which on its recent ~$158.55 share price works out to a 1.8% yield.

Vanguard FTSE Emerging Markets ETF is more concentrated, tracking 6,348 holdings specifically within developing economies and designed to closely mirror the performance of the FTSE Emerging Markets All Cap China A Inclusion Index. It maintains a similar sector tilt with technology at 32%, financial services at 20%, and consumer cyclical at 10%. Top holdings include Taiwan Semiconductor Manufacturing Co Ltd at 14.7%, Tencent Holdings Ltd at 2.9%, and Alibaba Group at 2.2%. The fund was launched in 2005. Vanguard FTSE Emerging Markets ETF has paid $1.50 per share over the trailing 12 months, which on its recent ~$60.01 share price works out to a 2.4% yield.

For more guidance on ETF investing, check out the full guide at this link.

Which looks like the better buy

It's smart to add some international exposure to a diversified stock portfolio. This can help mitigate some of the economic swings in the U.S market while also providing access to the upside potential of companies in emerging markets. Choosing between VT and VWO means deciding how you want your global exposure to look.

With VWO, you'll get concentrated exposure to emerging markets. With VT, you'll get exposure to those same emerging markets, but with extra stability from North America, Europe, and other developed markets. And over the long run, I think VT is a better option for most investors. You'll still get exposure to the growth potential of emerging markets (Taiwan Semiconductor, which is VWO's top holding, is No. 5 in VT's portfolio). Yet over long stretches, VT has outperformed VWO -- over the past 10 years, VT has grown about 228%, compared to VWO's 115% total return -- and with less volatility.

One caveat is that investors should be aware of the overlap that is likely to occur in their portfolios. If you hold VT, an S&P 500-tracking index fund, and individual stocks like Nvidia, Apple, or Microsoft, you'll be pretty concentrated in the U.S. market's top tech leaders. Just be aware of the concentration risk, but don't let that stop you from letting your winners run.

Sarah Sidlow has positions in Apple, Microsoft, Nvidia, and Vanguard International Equity Index Funds - Vanguard Total World Stock ETF. The Motley Fool has positions in and recommends Apple, Microsoft, Nvidia, Taiwan Semiconductor Manufacturing, Tencent, and Vanguard FTSE Emerging Markets ETF. The Motley Fool recommends Alibaba Group. The Motley Fool has a disclosure policy.