Which International ETF is the Better Buy: VEA or EEM?

The Vanguard FTSE Developed Markets ETF (NYSEMKT:VEA) provides exposure to mature economies outside the U.S. at a fraction of the cost of the iShares MSCI Emerging Markets ETF (NYSEMKT:EEM).

The Vanguard FTSE Developed Markets ETF and the iShares MSCI Emerging Markets ETF serve as primary instruments for investors looking to balance their portfolios with international equities. While the iShares fund focuses on higher-growth, higher-volatility developing nations like China and Taiwan, the Vanguard fund targets mature economies such as Japan, the United Kingdom, and Canada to offer potentially more stable performance. This comparison explores how their differing geographic concentrations and expense structures might influence your investment strategy.

Snapshot (cost & size)

Beta measures price volatility relative to the S&P 500; beta is calculated from monthly returns over the available fund history (up to five years). The 1-yr return represents total return over the trailing 12 months. Dividend yield is the trailing-12-month distribution yield.

Expenses are a significant point of divergence. The Vanguard fund is exceptionally cost-efficient, with a 0.03% expense ratio that is a small fraction of the 0.72% fee required by the iShares fund. Over time, this 0.69% difference in annual costs can noticeably impact total returns. Furthermore, for those focused on income, the Vanguard fund currently offers a superior payout through its 2.5% trailing-12-month dividend yield.

Performance & risk comparison

What's inside

Vanguard FTSE Developed Markets ETF tracks an index composed of large-, mid-, and small-cap companies across Canada, Europe, and the Pacific region. With 3,873 holdings, the portfolio is deeply diversified across sectors, led by Financial Services (23%), Technology (18%), and Industrials (18%). Its largest positions include Samsung Electronics Co Ltd (KOSE:A005930) at 3.14%, SK Hynix (NASDAQ:SKHY) at 2.99%, and ASML Holding NV (NASDAQ:ASML) at 2.34%. The fund was launched in 2007. Vanguard FTSE Developed Markets ETF has paid $1.81 per share over the trailing 12 months, which on its recent ~$72.50 share price works out to a 2.5% yield.

The iShares MSCI Emerging Markets ETF seeks to replicate the performance of an index that includes large and medium-sized company stocks in emerging markets. It manages 1,196 holdings and is heavily weighted toward Technology at 40%, followed by Financial Services at 20% and Consumer Cyclical at 8%. Top holdings include Taiwan Semiconductor Manufacturing (NYSE:TSM) at 15.14%, Samsung Electronics Ltd at 6.39%, and Sk Hynix at 4.65%. The fund was launched in 2003. iShares MSCI Emerging Markets ETF has paid $1.11 per share over the trailing 12 months, which on its recent ~$65.17 share price works out to a 1.7% yield.

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

Which looks like the better buy

An investor would be well-served having both of these ETFs in their portfolio, as international developed markets and emerging markets are two important asset classes. Both international developed markets and emerging markets have outperformed their U.S. counterparts not only this year, but over the past two years. And with U.S. markets currently wildly overvalued, having a diversified portfolio of both international developed markets and emerging markets is critical. Both are much cheaper than U.S. large-cap stocks and many experts believe they could outperform U.S. large-caps over the next few years.

Comparing VEA and EEM head-to-head, both have their benefits. The iShares ETF has had better returns year-to-date as well as over the past one- and three-year periods. The Vanguard ETF has better longer term returns over the past five- and 10-year periods.

But what I think gives the slight edge to VEA is its minuscule 0.03% expense ratio, which is far less than EEM's 0.72% ratio. Also, the Vanguard ETF pays out a higher distribution yield, providing additional income or total return. In addition, with its low expense ratio and diversified holdings, the Vanguard ETF is one of the best-in-class developed markets ETFs.

Dave Kovaleski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends ASML, Taiwan Semiconductor Manufacturing, and Vanguard FTSE Developed Markets ETF. The Motley Fool has a disclosure policy.