ETF Faceoff: Does iShares IXUS or EEM Offer Better Global Exposure?

A diversified investor should have exposure to non-U.S. stock, especially to find what should be faster-growing countries and companies.

iShares Core MSCI Total International Stock ETF (NASDAQ:IXUS) offers broad developed and emerging market exposure at a low cost, while iShares MSCI Emerging Markets ETF (NYSEMKT:EEM) targets high-growth developing economies with a narrower scope and higher fees.

International investing requires deciding between a catch-all approach or a targeted bet on developing economies. While both funds provide exposure to global growth outside the United States, the investment vehicles differ significantly in their cost structures, geographic scope, and volatility profiles. This analysis explores how the two iShares funds balance diversification against concentrated market access.

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 as of the close of June 18.

The iShares Core MSCI Total International Stock ETF is substantially more affordable with an expense ratio of 0.07%, whereas the iShares MSCI Emerging Markets ETF charges 0.72%. Additionally, IXUS offers a higher payout, with a trailing 12-month dividend yield of 2.90% compared to 1.60% for EEM.

Performance & risk comparison

What's inside

iShares MSCI Emerging Markets ETF seeks to replicate the performance of the MSCI Emerging Markets Index, which includes large- and medium-sized company stocks in developing nations. Its sector allocation is heavily weighted toward technology at 44%, financial services at 18%, and consumer cyclical at 8.4%. Launched in 2003, the fund is managed across one holding, yet its largest positions include Taiwan Semiconductor Manufacturing (2330.TW) at 14.7%, Samsung Electronics Ltd (005930.KS) at 7.8%, and Sk Hynix Inc (000660.KS) at 6.8%. It paid $1.11 per share over the trailing 12 months.

In contrast, iShares Core MSCI Total International Stock ETF provides much broader reach to replicate the investment returns of an MSCI index consisting of large, mid, and small-cap companies based outside the United States. Its sector makeup includes financial services at 21.6%, technology at 21.4%, and industrials at 15.2%. Managed across 4,166 holdings and launched in 2012, its largest positions include Taiwan Semiconductor at 4.3%, Samsung at 2.3, and Sk Hynix at 2%. This fund has a trailing-12-month dividend of $2.80 per share.

Which fund is the better buy?

Both funds offer diversification away from U.S. stocks, which dominate most indexes and the total value of the global equity markets. But there are differences to consider.

The iShares Core MSCI Total International Stock ETF, IXUS, is far less concentrated in mainland China than its iShares sibling. IXUS holds about 7% of its assets in Chinese stocks. The funds also hold sizeable positions in developed economies, including Japan (~15% of holdings), the U.K. (9%), and Canada (8.5%). The fact that it has so many holdings in the more liquid stock markets of developed nations is one reason it can boast a small expense ratio of 0.07%.

To access truly emerging markets like EEM, the iShares MSCI Emerging Markets ETF, costs more due to local exchange costs and liquidity issues. In that light, EEM’s 0.72% expense ratio makes sense, even if it is a strike against this non-U.S. fund. In EEM’s estimation, China remains an emerging market and constitutes more than 25% of its holdings, followed by Taiwan at 22.5% and South Korea at 15.4%. Is this truly an emerging market fund? One can argue that the world’s largest economy (China) and two of the most important countries for supplying industrials and technology components aren’t really emerging markets in the truest sense of the word. That is a strike against EEM in my estimation.

The lower expense ratio of IXUS, plus the fact it beats the 5-year performance of EEM (nearly 9% vs. 8%) and comes close over 10 years (both just under 10%), makes the iShares Core MSCI Total International ETF the better choice for those seeking diversification and performance.

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

Brendan Coffey 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.