IEFA vs. EEM: Which International ETF Is Better for Long-Term Investors?

Both the iShares Core MSCI EAFE ETF (NYSEMKT:IEFA) and the iShares MSCI Emerging Markets ETF (NYSEMKT:EEM) offer international equity exposure, but they serve different roles in a diversified portfolio. IEFA tracks developed markets like Japan and Europe, whereas EEM focuses on developing nations such as China and South Korea. This comparison helps clarify which regional focus aligns with your strategy.

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.

Cost is a significant differentiator, as the iShares Core MSCI EAFE ETF is much more affordable with a 0.07% expense ratio. The iShares Core MSCI EAFE ETF also offers a higher payout for those focused on income.

Performance & risk comparison

What's inside

The iShares Core MSCI EAFE ETF allocates roughly 23% to financial services, 20% to industrials, and 12% to technology. It holds about 2,600 positions, and its largest positions include ASML at 2.8%, HSBC Holdings at 1.3%, and Roche at 1.1%. Launched in 2012, the fund has a trailing-12-month dividend of $3.18 per share.

In contrast, the iShares MSCI Emerging Markets ETF is more concentrated, with 43% in technology, 18.5% in financial services, and 8% in consumer cyclical stocks. It reports more than 1,000 holdings, and its top positions include Taiwan Semiconductor Manufacturing at 14.7%, Samsung Electronics at 8.3%, and SK Hynix at 6.8%. Launched in 2003, this fund has paid $1.21 per share over the trailing 12 months.

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

What it means for investors

Investors looking to add international exposure to their portfolios may find themselves considering two iShares options: IEFA and EEM. IEFA provides low-cost exposure to developed international markets, while EEM focuses on emerging economies. That distinction is important. IEFA’s focus on developed countries outside of the U.S. and Canada gives you diversification with less risk, but possibly less total upside. It’s a huge fund with low fees and an attractive dividend yield, and it’s more diversified across steady industries like financial services and industrials.

EEM’s sector focus on technology is largely due to its position in Taiwan Semiconductor Manufacturing, which is headquartered in Taiwan despite trading on the U.S. stock market. Its explosive recent performance amid the artificial intelligence wave likely accounts for much of EEM’s recent returns. EEM is also a way to gain exposure to Samsung and SK Hynix, which are not directly available to retail investors in the U.S. While emerging market stocks have the potential for huge gains, they also carry greater risk in the form of currency fluctuations and political instability. EEM also has a much higher expense ratio.

Long-term investors looking to maximize their diversification may want to hold both funds, but it might be wise to allocate more investment dollars to IEFA, given its relative safety, lower fees, and higher yield. If you’re looking to capture some of the exciting gains of EEM, you could also hand-pick individual winners, like Taiwan Semi, rather than taking on the risk of 1,000 emerging markets companies.

HSBC Holdings is an advertising partner of Motley Fool Money. Sarah Sidlow has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends ASML and Taiwan Semiconductor Manufacturing. The Motley Fool recommends HSBC Holdings and Roche Holding AG. The Motley Fool has a disclosure policy.