These International ETFs Can Add Unique Diversity to Your Portfolio

The iShares Core MSCI EAFE ETF (NYSEMKT:IEFA) and iShares MSCI ACWI ex U.S. ETF (NASDAQ:ACWX) offer broad access to non-U.S. equities, but their approaches differ: IEFA tracks only developed markets, while ACWX adds emerging markets into the mix. This comparison highlights differences in cost, performance, sector tilts, and portfolio construction for investors considering international diversification.

Snapshot (cost & size)

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

IEFA appears more affordable with its lower expense ratio, while also offering a higher dividend payout. With over 800 more companies within its total holdings, IEFA’s total assets are significantly higher in value than ACWX’s.

Performance & risk comparison

What's inside

Launched nearly 18 years ago, ACWX tracks non-U.S. large- and mid-cap stocks, holding 1,796 companies across developed and emerging markets, with a portfolio tilt toward financial services, industrials, and technology. The largest positions are Taiwan Semiconductor Manufacturing (2330.TW), Tencent Holdings Ltd (0700.HK), and ASML Holding N.V. (AMS:ASML).

IEFA, by contrast, focuses purely on developed markets with a larger portfolio of 2,619 stocks and a lighter allocation to tech companies. Created in 2012, the fund’s largest holdings are ASML, Roche Holding AG (SIX:ROG.SW), and HSBC Holdings PLC (LON:HSBA).

What this means for investors

With both funds excluding American stocks, investors should be aware that international stocks in each ETF’s holdings can move very differently from U.S. stocks and exhibit irregular price movement that can affect the ETFs in ways that U.S. investors may not be used to with U.S. investments.

With most of ACWX’s top holdings based in Asia, and most of IEFA’s in Europe, U.S. investors may want to keep an eye on relevant events in the relevant foreign country or continent to better understand the international stocks associated with each ETF. Also, be aware that both ETFs pay their dividends semi-annually, which may be an uncommon payout frequency for some people.

Regardless, IEFA edges out ACWX in terms of expense ratio, dividends, and return within the last five years. But if investors still want exposure to both emerging and developed markets, then ACWX is still not a bad option to consider.

Glossary

ETF: Exchange-traded fund that holds a basket of securities and trades on an exchange like a stock.
Expense ratio: Annual fund fee, expressed as a percentage of assets, deducted from returns to cover operating costs.
Dividend yield: Annual dividends paid by a fund divided by its current share price, shown as a percentage.
Emerging markets: Countries with developing economies and financial markets, generally faster-growing but riskier than developed markets.
Developed markets: Countries with mature, stable economies and well-established financial systems, such as Japan or the U.K.
Beta: Measure of a fund’s volatility compared with a benchmark index; above 1 is more volatile, below 1 less.
AUM: Assets under management; the total market value of all assets held by a fund.
Max drawdown: The largest peak-to-trough decline in a fund’s value over a specific period.
Total return: Investment performance including price changes plus all dividends and distributions, assuming they are reinvested.
Holdings: The individual securities, such as stocks or bonds, that a fund owns in its portfolio.
Sector tilt: When a fund has a larger or smaller weighting in certain industries compared with its benchmark.
Portfolio construction: The process of selecting and weighting investments inside a fund to achieve specific objectives.

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

Adé Hennis has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.