Vanguard vs. iShares: Is VWO or IEMG the Better Emerging Markets ETF?

Vanguard FTSE Emerging Markets ETF (NYSEMKT:VWO) and iShares Core MSCI Emerging Markets ETF (NYSEMKT:IEMG) differ on expense ratio, the number of holdings, and recent performance, with VMO offering broader stock coverage, while IEMG has delivered stronger one-year returns.

Both VWO and IEMG are large, highly liquid exchange-traded funds tracking emerging market stocks, aiming to provide investors with a diversified stake in fast-growing economies outside developed markets. While their sector allocations and top holdings are similar, subtle differences in holdings count, cost, and recent risk-adjusted returns may appeal to different types of investors looking for broad international exposure.

Snapshot (cost & size)

Beta measures price volatility relative to the S&P 500; beta is calculated from five-year weekly returns. The one-year return represents total return over the trailing 12 months.

VWO is modestly more affordable with its lower expense ratio, while IEMG is priced at a slight premium but still competes well on cost. VWO’s yield edges out IEMG by a small margin, which may appeal to income-focused investors.

Performance & risk comparison

What's inside

IEMG holds approximately 2,725 stocks, providing broad exposure across emerging markets with its largest sector allocations in technology (26%), financial services (21%), and consumer cyclicals (12%). Its top positions include Taiwan Semiconductor Manufacturing, Tencent Holdings, and Samsung Electronics, and the fund has been operating for 13 years.

VWO is similarly diversified but with a much broader portfolio of 6,146 holdings. Its sector weightings are nearly identical, led by technology (23%), financial services (21%), and consumer cyclicals (13%). The largest positions for VWO are Taiwan Semiconductor Manufacturing, Tencent Holdings, and Alibaba Group Holdings.

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What this means for investors

These two emerging markets ETFs are incredibly similar in several ways. Since 2012, VWO and IEMG have delivered nearly identical annualized total returns of 4.8% and 5%, respectively. Their sector allocations are almost identical, their expense ratios are low, their dividend yields are virtually the same, and they both trade at around 15 times earnings across their entire portfolio.

While I wouldn't personally buy either ETF, as each has at least 25% of its allocation to Chinese stocks that I avoid due to the geopolitical risks, I would lean toward IEMG if I had to choose. My main reason for this decision is that IEMG includes South Korea as an emerging market, whereas Vanguard doesn't. There's probably an argument to be had as to whether the country truly is "emerging" or not. Still, for the sake of picking an ETF, I like the idea of having a 10% portion of IEMG's portfolio dedicated to South Korea and its impressive economy.

That said, VWO holds more than twice as many stocks as IEMG, so it may be a somewhat less volatile ride for investors. Regardless, each ETF has roughly one-sixth of its portfolio allocated to Taiwan Semiconductor Manufacturing, Tencent, and Alibaba, so I would ensure you are comfortable holding these stocks before making a purchase.

Glossary

Expense ratio: The annual fee a fund charges investors, expressed as a percentage of assets under management.
Emerging markets: Economies in the process of rapid growth and industrialization, typically outside developed countries.
ETF (Exchange-Traded Fund): An investment fund traded on stock exchanges, holding a diversified basket of assets.
Beta: A measure of an investment's volatility compared to the overall market, usually the S&P 500.
Dividend yield: Annual dividends paid by a fund or stock, shown as a percentage of its current price.
AUM (Assets Under Management): The total market value of assets a fund manages on behalf of investors.
Max drawdown: The largest observed percentage drop from a fund's peak value to its lowest point over a period.
Holdings: The individual securities or assets owned within a fund or portfolio.
Sector allocation: The distribution of a fund's investments across different industry sectors.
Total return: The investment's price change plus all dividends and distributions, assuming those payouts are reinvested.
Risk-adjusted return: A measure of investment returns that accounts for the amount of risk taken to achieve them.

Josh Kohn-Lindquist has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Taiwan Semiconductor Manufacturing, Tencent, and Vanguard International Equity Index Funds - Vanguard Ftse Emerging Markets ETF. The Motley Fool recommends Alibaba Group. The Motley Fool has a disclosure policy.