iShares Core MSCI EAFE ETF (IEFA) Offers Broader Market Coverage at Lower Costs Than iShares MSCI Emerging Markets ETF (EEM)

Both the iShares Core MSCI EAFE ETF (NYSEMKT:IEFA) and the iShares MSCI Emerging Markets ETF (NYSEMKT:EEM) provide global equity exposure beyond the U.S., but their approaches diverge.

IEFA covers developed markets outside the U.S. and Canada, while EEM focuses exclusively on emerging economies.

Here's how they stack up on cost, returns, risk, and portfolio makeup.

Snapshot (cost & size)

Beta measures price volatility relative to the S&P 500; figures use five-year weekly returns.

IEFA is more affordable, with an annual expense ratio of just 0.07% compared to EEM's 0.72% (as reported by Financial Modeling Prep).

IEFA also delivers a higher payout, with a 2.9% dividend yield versus EEM's 2.1%.

Performance & risk comparison

What's inside

IEFA holds 2,611 stocks, with a notable emphasis on financial services (22%), industrials (20%), and healthcare (10%).

Its largest positions include ASML Holding NV, SAP, and Nestlé.

The fund's 13-year history and broad sector representation result in a well-diversified approach to non-U.S. developed equities.

By contrast, EEM is focused exclusively on emerging markets, with 1,198 holdings and heavier exposure to technology (25%) and financial services (23%).

Its top allocations include Taiwan Semiconductor Manufacturing, Tencent Holdings, and Alibaba Group Holding.

Foolish take

I personally would lean toward iShares Core MSCI EAFE ETF (IEFA) for a number of reasons.

First, the company's expense ratio is only one-tenth that of EEM's at 0.07%. This ratio is very reasonable, whereas EEM's 0.72% expense is somewhat excessive.

Second, EEM's top five holdings account for more than one-fourth of its portfolio. This top-heavy weighting doesn't offer as much diversification and safety as its 1,000-plus holdings advertise. Making matters worse, Taiwan Semiconductor Manufacturing accounts for 12% of EEM's portfolio. While TSM is one of the most powerful businesses in the world, it is fraught with geopolitical risks, making it a somewhat nerve-wracking top holding.

Third, IEFA's 2.9% dividend yield also gives it another advantage over EEM, whose yield is just 2.2%. Adding to this point, IEFA has grown its dividend by 5% annually over the last decade, while EEM has only grown its payouts by 3% over the same time.

Lastly, despite focusing on "high growth" emerging markets, EEM has only delivered total returns of 72% since 2012. IEFA has more than doubled these results over the same time, despite a more "conservative" basket of holdings.

Thanks to these reasons, iShares Core MSCI EAFE ETF (IEFA) is the clear winner in my opinion.

Glossary

ETF: Exchange-traded fund; a fund that trades on stock exchanges and holds a basket of assets.
Expense ratio: The annual fee, as a percentage of assets, that a fund charges to cover operating costs.
Dividend yield: Annual dividends paid by a fund or stock divided by its share price, expressed as a percentage.
Beta: A measure of a fund's volatility compared to the overall market; higher beta means higher risk.
AUM: Assets under management; the total market value of assets a fund manages on behalf of investors.
Max drawdown: The largest percentage drop from a fund's peak value to its lowest point over a specific period.
Developed markets: Economies with advanced infrastructure, stable governments, and established financial systems, such as Europe and Japan.
Emerging markets: Countries with developing economies, less mature financial systems, and higher growth potential but greater risk.
Sector tilt: When a fund has a larger allocation to certain industries or sectors compared to a benchmark.
Diversification: Spreading investments across various assets or sectors to reduce risk.

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

Josh Kohn-Lindquist 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.