Vanguard VWO Offers Broader Emerging Markets Exposure Compared to EEF

Both the Vanguard FTSE Emerging Markets ETF (NYSEMKT:VWO) and the iShares MSCI Emerging Markets ETF (NYSEMKT:EEM) provide investors with access to large- and mid-cap stocks across global emerging markets.

Each tracks a different emerging-markets index, but both aim for long-term growth in regions that carry higher risk and volatility than developed markets.

Snapshot (cost & size)

Beta measures price volatility relative to the S&P 500.

VWO offers far lower fees, with an annual expense ratio of just 0.07% compared to EEM’s 0.72%. VWO also delivers a higher dividend payout, which may appeal to income-focused investors.

Performance & risk comparison

What's inside

VWO holds 6,059 stocks spanning technology (22%), financial services (21%), and consumer cyclicals (14%), offering broad exposure across emerging economies. Its largest positions are Taiwan Semiconductor Manufacturing Co Ltd, Tencent Holdings Ltd, and Alibaba Group Holding Ltd.

By contrast, EEM holds 1,198 stocks, with a tilt towards technology (25%), financial services (23%), and consumer cyclicals (13%). Its top holdings mirror VWO’s, but with slightly different weightings. EEM’s approach and index tracking may lead to modestly different country or sector exposures over time.

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Foolish take

Stocks from emerging markets can be more susceptible to volatility than those in developed markets, and investing in an emerging markets ETF can help mitigate some of that risk with increased diversification.

Both VWO and EEM offer ample diversification with thousands of stocks, and neither is overly concentrated on any one industry. EEM does allocate slightly more of its portfolio toward tech, while VWO contains far more holdings in total. EEF can provide an advantage for those looking for a more targeted approach, while VWO has the edge when it comes to sheer numbers -- both in terms of holdings and AUM.

The two ETFs also offer similar dividend yields and five-year returns, but they differ sharply in their expense ratios. VWO boasts a much lower expense ratio of 0.07% per year, compared to EEF's 0.72%. For investors with very large account balances, this could amount to a significant difference in annual fees.

Glossary

ETF (Exchange-Traded Fund): A fund that trades on stock exchanges, holding a basket of assets like stocks or bonds.
Expense ratio: The annual fee, expressed as a percentage of assets, that a fund charges its investors.
Diversification: Investing in a variety of assets to reduce risk from any single investment.
Dividend yield: Annual dividends paid by a fund or stock, shown as a percentage of its current price.
Beta: A measure of an investment's volatility compared to the overall market, often the S&P 500.
AUM (Assets Under Management): The total market value of assets a fund or manager oversees.
Max drawdown: The largest percentage drop from a fund's peak value to its lowest point over a period.
Emerging markets: Countries with developing economies, often offering higher growth potential but increased risk.
Index tracking: The strategy of replicating the performance of a specific market index by holding its components.
Sector weights: The proportion of a fund's assets allocated to different industry sectors.
Consumer cyclicals: Companies whose performance is closely tied to economic cycles, like retailers and automakers.

Katie Brockman has positions in Vanguard International Equity Index Funds - Vanguard Ftse Emerging Markets ETF. The Motley Fool has positions in and recommends Taiwan Semiconductor Manufacturing, Tencent, and Vanguard International Equity Index Funds - Vanguard Ftse Emerging Markets ETF. The Motley Fool recommends Alibaba Group. The Motley Fool has a disclosure policy.