Better Emerging Markets ETF: Vanguard's VWO vs. iShares' EEM

iShares MSCI Emerging Markets ETF (NYSEMKT:EEM) is costlier and more volatile, while Vanguard FTSE Emerging Markets ETF (NYSEMKT:VWO) offers broader holdings, a much lower fee, and a slightly higher yield — but lags EEM in recent total return.

Both EEM and VWO target large- and mid-cap stocks from emerging markets, with heavy exposure to Asia and big names like Taiwan Semiconductor Manufacturing (NYSE:TSM) and Tencent Holdings (OTC:TCEHY). This comparison unpacks key differences in cost, performance, risk, and portfolio makeup to help long-term investors weigh which emerging markets ETF may appeal to their needs.

Snapshot (cost & size)

Beta measures price volatility relative to the S&P 500; beta is calculated from five-year weekly returns. The 1-yr return represents total return over the trailing 12 months.

VWO is much more affordable than EEM, with an expense ratio that is 65 percentage points lower, and it also pays a modestly higher dividend yield at 2.8% versus EEM’s 2.2%.

Performance & risk comparison

What's inside

VWO tracks over 2,000 stocks across emerging markets, with technology (23%), financial services (21%), and consumer cyclical (13%) as top sectors. Its largest positions are Taiwan Semiconductor Manufacturing, Tencent Holdings, and Alibaba Group Holding (NYSE:BABA), and the fund’s 20.8-year track record makes it one of the oldest in the space. No leverage, currency hedge, or ESG overlays are present.

EEM is a bit more concentrated, holding 1,215 stocks with similar sector tilts: technology (27%), financial services (22%), and consumer cyclical (12%). Its portfolio is anchored by Taiwan Semiconductor Manufacturing, Tencent Holdings, and Samsung Electronics (OTC:SSNL.F), so the top holdings and sector exposures are closely aligned with VWO. Neither fund includes notable structural quirks.

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

What this means for investors

The iShares MSCI Emerging Markets ETF (EEM) and Vanguard FTSE Emerging Markets ETF (VWO) offer similar exposure to emerging markets, considering the similarity in sector weighting and that their top two stocks are identical. However, performance will differ due to the differences in overall holdings.

EEM includes stocks from South Korea, which is why Samsung is among its largest holdings, while VWO does not since the latter doesn't classify the country as an emerging market.

Consequently, EEM's performance over the past year was significantly stronger than VWO's. Investors weighing which ETF to consider would have to decide if exposure to South Korean companies is important to them.

Otherwise, VWO looks like the more compelling ETF. Its assets under management are much larger than EEM's, and this gives the ETF far greater liquidity. In addition, its substantially lower expense ratio means it's less costly for investors. VWO also offers a better dividend yield, adding to the gains investors can achieve with this ETF.

Glossary

Expense ratio: The annual fee, expressed as a percentage, that a fund charges to cover operating costs.
Dividend yield: The annual dividends paid by a fund, shown as a percentage of its current price.
Beta: A measure of a fund’s volatility compared to the overall stock market, typically the S&P 500.
AUM (Assets Under Management): The total market value of all assets managed by a fund.
Max drawdown: The largest percentage drop from a fund’s peak value to its lowest point over a specific period.
Total return: The investment’s price change plus all dividends and distributions, assuming those payouts are reinvested.
Emerging markets: Countries with developing economies and financial markets that are growing but not yet fully mature.
Sector tilt: When a fund has a higher allocation to certain industry sectors compared to a benchmark or the market.
Concentration: The degree to which a fund’s assets are invested in a small number of holdings or sectors.
Leverage: The use of borrowed money to increase potential investment returns, which also increases risk.
Currency hedge: A strategy to reduce the impact of currency exchange rate fluctuations on investment returns.
ESG overlays: Additional investment criteria that consider environmental, social, and governance factors when selecting securities.

Robert Izquierdo has positions in Alibaba Group and Taiwan Semiconductor Manufacturing. 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.