Vanguard VWO vs VT: Is Emerging Market or Total World Market Focus Better?

Balanced portfolios ideally have exposure to a diverse selection of equities. Investing outside developed markets like the U.S. and Europe is a surefire way to diversify. The Vanguard FTSE Emerging Markets ETF (NYSEMKT:VWO) and the Vanguard Total World Stock ETF (NYSEMKT:VT) offer options for including developing-world stocks in your investment plan.

Both ETFs are cornerstone offerings from Vanguard designed for low-cost equity exposure. While the emerging markets fund zeroes in on specific regions like China and Taiwan, the total world fund provides a comprehensive portfolio that includes both domestic and international markets in a single ticker.

Snapshot (cost & size)

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

These two funds are among the most affordable in their categories, each carrying a 0.06% expense ratio. While costs are identical, income-focused investors may prefer VWO for its significantly higher trailing-12-month distribution yield.

Performance & risk comparison

What's inside

Vanguard Total World Stock ETF seeks to track the FTSE Global All Cap Index, providing exposure to over 10,000 companies across developed and emerging markets. Its largest positions include NVIDIA Corp (NASDAQ:NVDA) at 4.15%, Apple Inc (NASDAQ:AAPL) at 3.47%, and Microsoft Corp (NASDAQ:MSFT) at 2.69%. Launched in 2008, it holds 10,041 securities and has a trailing-12-month dividend of $2.52 per share. The portfolio is weighted toward technology (22%), financial services (18%), and technology services (13%).

Vanguard FTSE Emerging Markets ETF tracks the FTSE Emerging Markets All Cap China A Inclusion Index, which focuses on developing economies such as China and Brazil. Its largest positions include Taiwan Semiconductor Manufacturing Co Ltd (TPE:2330) at 14.09%, Tencent Holdings Ltd (HKG:0700) at 3.14%, and Alibaba Group Holding Ltd (HKG:9988) at 2.46%. Launched in 2005, it holds 6,355 securities and has a trailing-12-month dividend of $1.71 per share. The portfolio tilts toward technology at 26%, financial services at 21%, and technology services at 7.35%.

Which looks like the better buy?

Performance-wise, both funds have delivered excellent returns, each around 30% over the past 12 months. Based solely on returns, the Vanguard FTSE Emerging Markets ETF is the winner, but it comes with a caveat: more of VWO’s returns come from dividends, which can generate taxes depending on the type of investment account the fund sits in. The Vanguard Total World Stock ETF had a dividend yield of 1.6% in the past year, compared to 2.8% for VWO.

One way to decide which of the two funds is the better buy is to consider how each will fit into your portfolio. If you’re looking for a one-stop shop fund to invest in, then VT, the total world stock market ETF, is the better bet. This fund includes exposure to the U.S. stock markets. Given that the U.S. is the world’s largest equity market, the Vanguard Total World Stock ETF allocates 61% of its portfolio to U.S. stocks.

Many investors already have lots of U.S. stock exposure, however. If you hold other funds that track the S&P 500 or some other popular U.S. index, you already hold many of the same securities. For pure diversification, the Vanguard FTSE Emerging Markets ETF is the better choice: 99.3% of its portfolio is in emerging markets, with 0.7% in Europe and no U.S. holdings.

At a rock-bottom expense ratio of 0.06% and each holding thousands of stocks in their portfolios, both are sound choices for performance and diversification.

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

Brendan Coffey has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Microsoft, Nvidia, Taiwan Semiconductor Manufacturing, Tencent, and Vanguard FTSE Emerging Markets ETF. The Motley Fool recommends Alibaba Group. The Motley Fool has a disclosure policy.