Better Emerging Markets ETF: Schwab's SCHE vs. Vanguard's VWO

The choice between the Schwab Emerging Markets Equity ETF (NYSEMKT:SCHE) and Vanguard FTSE Emerging Markets ETF (NYSEMKT:VWO) centers on portfolio depth, as both funds charge identical fees but differ in diversification and yield.

Investing in developing economies offers exposure to high-growth markets that often move independently of U.S. indices. Both Schwab Emerging Markets Equity ETF and Vanguard FTSE Emerging Markets ETF track FTSE indices, capturing companies across nations such as China, Taiwan, and India, while maintaining extremely low costs for long-term investors.

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-year return represents total return over the trailing 12 months. Dividend yield is the trailing-12-month distribution yield.

Both funds are highly cost-efficient, featuring a 0.06% expense ratio. However, the Schwab fund offers a more generous payout, with a 2.7% trailing dividend yield that currently exceeds the 2.1% yield provided by the Vanguard fund.

Performance & risk comparison

What's inside

The Vanguard FTSE Emerging Markets ETF focuses on a massive basket of approximately 5,942 stocks, emphasizing technology (32%), financial services (20%), and consumer cyclical names (10%). Its largest positions include Taiwan Semiconductor Manufacturing Co Ltd at 15.76%, Tencent Holdings Ltd (SEHK:0700) at 2.82%, and Alibaba Group Holding Ltd at 2.11%. The fund was launched in 2005, and has paid $1.22 per share over the trailing 12 months, which on its recent ~$58.79 share price works out to a 2.1% yield.

The Schwab Emerging Markets Equity ETF tracks a narrower but still expansive group of 2,238 holdings, with a sector tilt toward technology at 35%, financial services at 21%, and consumer cyclical at 9%. Top holdings include Taiwan Semiconductor Manufacturing at 17.59%, Tencent Holdings at 3.14%, and Alibaba Group Holding at 2.49%. The fund was launched in 2010, and has paid $0.95 per share over the trailing 12 months, which on its recent ~$36.14 share price works out to a 2.7% yield.

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Which looks like the better buy

Both the Vanguard FTSE Emerging Markets ETF (VWO) and Schwab Emerging Markets Equity ETF (SCHE) provide investors with exposure to emerging market economies, so which is the better fund to pick?

VWO and SCHE are similar in many ways, including one-year and five-year returns. Vanguard's ETF was more expensive, but it recently lowered the expense ratio, so now the two match. Where VWO has the advantage is in its far larger AUM of $164.7 billion, and substantial number of holdings. VWO is the fund for those who want maximum liquidity, a massive asset base, and a broader basket of nearly 6,000 global emerging market equities. It's also a natural choice if you are already a Vanguard customer.

SCHE wins out on dividend yield, and is a convenient choice for investors who are already Schwab customers. This fund restricts its scope strictly to larger companies, while VWO includes small-cap stocks, contributing to the significant difference in the number of holdings in each fund.

Robert Izquierdo has positions in Alibaba Group and Taiwan Semiconductor Manufacturing. The Motley Fool has positions in and recommends Taiwan Semiconductor Manufacturing, Tencent, and Vanguard FTSE Emerging Markets ETF. The Motley Fool recommends Alibaba Group. The Motley Fool has a disclosure policy.