Better Vanguard International ETF: VEA Targeting Developed Markets vs. VWO's Emerging Markets Focus

The Vanguard FTSE Developed Markets ETF (NYSEMKT:VEA) provides low-cost exposure to established international economies, while the Vanguard FTSE Emerging Markets ETF (NYSEMKT:VWO) targets growth in developing nations with higher volatility.

These two funds are staple building blocks for investors seeking to diversify outside of the United States. While they both provide broad international exposure, they differ fundamentally in terms of geographic risk, sector concentration, and the economic maturity of the underlying companies in their portfolios.

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-year return represents total return over the trailing 12 months. Dividend yield is the trailing-12-month distribution yield.

Both funds are exceptionally affordable for international exposure, though the Vanguard FTSE Developed Markets ETF carries a lower expense ratio of 0.03% compared to 0.06% for its counterpart. It also currently offers a higher payout to income-focused investors.

Performance & risk comparison

What's inside

The Vanguard FTSE Developed Markets ETF tracks the FTSE Developed All Cap ex U.S. Index and holds 3,873 stocks. Its portfolio is weighted toward financial services at 24%, industrials at 17%, and technology at 15%. Its largest positions include Samsung Electronics at 2.61%, SK Hynix at 2.01%, and ASML Holding NV at 1.96%. The fund was launched in 2007, and has paid $1.99 per share over the trailing 12 months, which on its recent ~$71.4 share price works out to a 2.8% yield.

The Vanguard FTSE Emerging Markets ETF tracks the FTSE Emerging Markets All Cap China A Inclusion Index and maintains a larger basket of 5,942 securities. It tilts more significantly toward technology at 32%, with additional concentrations in financial services at 20% and consumer cyclical at 10%. Its top holdings include Taiwan Semiconductor Manufacturing Co at 14.73%, Tencent Holdings at 2.90%, and Alibaba Group at 2.19%. The fund was launched in 2005, and has paid $1.50 per share over the trailing 12 months, which on its recent ~$60.0 share price works out to a 2.4% yield.

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Which looks like the better buy

Vanguard is known for low-cost investment offerings, and for investors seeking to diversify beyond U.S. companies into international stocks, the Vanguard FTSE Developed Markets ETF (VEA) and Vanguard FTSE Emerging Markets ETF (VWO) offer two inexpensive options. In fact, VWO recently lowered its expense ratio.

Choosing between VEA and VWO comes down to the individual investor's goals. If your priority is stability, VEA is the better fund, since investing in emerging markets can be more volatile. That said, VWO offers exposure to the high-growth potential of emerging economies.

Personally, I think VEA is the better ETF. That's because 26.5% of VWO's holdings are in Chinese companies. VEA does not invest in China, since it is designated as an emerging market. The reason I am not a fan of Chinese businesses is because the government has outsized control over the fate of these companies. For example, I invested in Alibaba, but its plan to spin off its financial arm was thwarted by the government.

Moreover, VEA offers a higher dividend yield, lower expense ratio, and larger AUM, providing greater liquidity. It also holds key artificial intelligence companies such as Samsung and ASML, making it a solid, stable ETF to hold for the long term.

Robert Izquierdo has positions in ASML, Alibaba Group, and Taiwan Semiconductor Manufacturing. The Motley Fool has positions in and recommends ASML, Taiwan Semiconductor Manufacturing, Tencent, Vanguard FTSE Developed Markets ETF, and Vanguard FTSE Emerging Markets ETF. The Motley Fool recommends Alibaba Group. The Motley Fool has a disclosure policy.