SPDR vs. Schwab International ETFs: 1 Red Flag Investors Can't Ignore

State Street SPDR Portfolio Developed World ex-US ETF (NYSEMKT:SPDW) provides low-cost exposure to mature international economies, while Schwab Emerging Markets Equity ETF (NYSEMKT:SCHE) focuses on faster-growing but often more volatile emerging markets.

Investors seeking to diversify away from domestic stocks often look to international funds to balance their portfolios. Here, we’re evaluating two distinct approaches to global investing: the SPDR fund, which tracks developed economies like Japan and the United Kingdom, and the Schwab fund, which targets developing nations such as China and India. Both ETFs serve as foundational building blocks, yet they provide access to very different economic cycles and geopolitical risks.

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.

The SPDR fund is cheaper, featuring an expense ratio that is less than half that of its Schwab counterpart. That said, the Schwab ETF’s ratio is still in the single digits; I think it’s hard to argue it’s expensive. Plus, SCHE has a higher dividend yield, which may appeal to income-focused investors.

Performance & risk comparison

What's inside

The SPDR ETF focuses on established international markets outside of the United States. Its portfolio is led by financial services at 22%, followed by industrials at 18%, and technology at 17%. With 2,453 holdings, its largest positions include Samsung Electronics at 3.05%, SK Hynix at 2.08%, and ASML (NASDAQ:ASML) at 2.07%. Although it holds thousands of stocks, SPDW’s top 10 holdings make up 13.1% of the portfolio. This fund was launched in 2007 and has paid $1.47 per share in dividends over the trailing 12 months.

In contrast, the Schwab ETF focuses on developing economies, leading to a much higher concentration in technology at 34%, with financial services at 20%, and consumer cyclicals at 10%. It holds 2,207 stocks, and its top positions include Taiwan Semiconductor Manufacturing (NYSE:TSM) at 17.05%, Tencent (OTC:TCEHY) at 3.34%, and Alibaba Group Holding Ltd. (NYSE:BABA) at 2.61%. SCHE’s top 10 positions make up roughly 30% of the portfolio. Launched in 2010, the Schwab fund has a trailing-12-month dividend payout of $0.94 per share.

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

What this means for investors

The Schwab and SPDR ETFs both take a global approach to investing, but Schwab notably focuses on emerging markets, while SPDR invests in established international markets. They hold a few thousand stocks each, so investors probably won't be too concerned about diversification. But in SCHE's case, I think they should be.

The Schwab ETF's top 10 holdings account for nearly one-third of the portfolio, for starters. That's pretty concentrated. But far more concerning from a diversification standpoint is that Taiwan Semi is a 17% position. This may be a simple case of "letting winners run," which is fine, but most investors purchase ETFs because they want a basket of stocks, not a huge piece of some chipmaker and a handful of Chinese companies. (I pity the 2,000-some stocks that will never be relevant to this ETF's performance.) Taiwan Semi has definitely been a great investment over the past five years, but if you're interested in the chipmaker, why not just buy its stock?

For that reason alone, I wouldn't buy shares of SCHE.

Erin Kennedy has positions in Taiwan Semiconductor Manufacturing. The Motley Fool has positions in and recommends ASML, Taiwan Semiconductor Manufacturing, and Tencent. The Motley Fool recommends Alibaba Group. The Motley Fool has a disclosure policy.