One Stock Drives 16% of SCHE — Check Before You Buy

Investors choosing between Schwab Emerging Markets Equity ETF (NYSEMKT:SCHE) and iShares Core MSCI Total International Stock ETF (NASDAQ:IXUS) must decide between targeted emerging markets exposure and a broader, all-encompassing international portfolio.

These two funds offer low-cost access to international equities, but they occupy fundamentally different niches within a diversified portfolio. While the Schwab fund focuses exclusively on developing economies like China and Taiwan, the iShares fund serves as a broader core holding by covering nearly all non-U.S. markets, including established economies in Europe and Japan alongside emerging regions.

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.

Investors will find that both funds are exceptionally lean, featuring identical 0.07% expense ratios that rank among the lowest in the international category. However, the iShares fund currently offers a slightly more generous payout to income-seekers, sporting a 2.90% dividend yield compared to the 2.60% yield produced by the Schwab fund.

Performance & risk comparison

What's inside

The iShares Core MSCI Total International Stock ETF (NASDAQ:IXUS) offers massive diversification by seeking to track an index composed of large-, mid-, and small-capitalization stocks outside the United States. Its portfolio holds 4,160 stocks across a variety of sectors, led by financial services at 23%, industrials at 16%, and technology at 16%. Its largest positions include ASML Holding NV (NASDAQ:ASML) at 1.28%, Tencent Holdings Ltd(OTC:TCEHY) at 0.93%, and HSBC Holdings PLC(NYSE:HSBC) at 0.73%. This fund, which launched in 2012, provides a "one-stop shop" for global exposure and has paid $2.74 per share over the trailing 12 months.

In contrast, the Schwab Emerging Markets Equity ETF (NYSEMKT:SCHE) provides targeted exposure to developing nations by tracking the total return of the FTSE Emerging Index. The fund is more concentrated than its peer, holding 2,211 stocks and focusing heavily on technology at 27% and financial services at 22%. Its top holdings include Taiwan Semiconductor Manufacturing (NYSE:TSM) at 16.22%, Tencent Holdings Ltd at 3.55%, and Alibaba Group Holding Ltd(NYSE:BABA) at 2.74%. Since it launched in 2010, the fund has served as a specialized tool for emerging markets, paying $0.94 per share over the trailing 12 months. Unlike the iShares fund, it ignores developed markets like Japan or France entirely.

What this means for investors

If you already own Taiwan Semiconductor directly — and many investors do — buying SCHE for emerging markets exposure is going to give you more TSM than you bargained for. The fund's top holding sits at 16.22%, which means roughly one out of every six dollars in SCHE is riding on a single stock. That's not a diversified emerging markets position. That's a concentrated TSMC bet with 2,210 other stocks along for the ride. Compare that to IXUS, where the largest holding (ASML) is 1.28%. The cap-weighted reality of emerging markets indexes is that Taiwan Semi has gotten so large relative to the rest of the developing world that any FTSE Emerging tracker is going to lean heavily on it. That's not a flaw in SCHE's construction — it's just how the index works right now. But this is a great lesson in why digging into an ETF's actual holdings matters before you buy. A label like "emerging markets" suggests broad exposure across dozens of countries and sectors, and the headline numbers — 2,211 stocks, 0.07% expense ratio — reinforce that impression. The concentration only shows up when you open the hood. This is a great example of why checking at least the top ten holdings of an ETF ought to be a standard step before clicking the sell button.

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HSBC Holdings is an advertising partner of Motley Fool Money. Seena Hassouna has positions in ASML and Taiwan Semiconductor Manufacturing. The Motley Fool has positions in and recommends ASML, Taiwan Semiconductor Manufacturing, and Tencent. The Motley Fool recommends Alibaba Group and HSBC Holdings. The Motley Fool has a disclosure policy.