Choosing an International ETF: The Case For the Developed Market Favorite vs. the Low-Cost Emerging Challenger

Vanguard FTSE Developed Markets ETF (NYSEMKT:VEA) and iShares Core MSCI Emerging Markets ETF (NYSEMKT:IEMG) offer distinct ways to diversify a portfolio beyond U.S. borders with low-cost, broad-market strategies.

While both funds target international equities, they focus on different economic tiers. The Vanguard fund invests in established markets such as Canada, Europe, and the Pacific region. In contrast, the iShares fund tracks developing economies, which can offer higher growth potential alongside higher geopolitical and currency risks.

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

The Vanguard fund is more affordable with an expense ratio of 0.03%, compared to 0.09% for the iShares fund. It also offers a higher payout, with a yield gap of +0.20 ppt over its counterpart.

Performance & risk comparison

What's inside

Vanguard FTSE Developed Markets ETF provides exposure to financial services (24%), industrials (18%), and technology (16%). It holds 3,873 stocks, and its largest positions include Samsung Electronics Co Ltd at 2.61%, SK Hynix Inc at 2.01%, and ASML Holding NV at 1.96%. The fund was launched in 2007. Vanguard FTSE Developed Markets ETF has paid $1.70 per share over the trailing 12 months, which, on its recent ~$70.35 share price, works out to a 2.4% yield.

iShares Core MSCI Emerging Markets ETF leans more heavily into technology at 42%, followed by financial services at 18% and consumer cyclical at 8%. It holds 2,862 stocks, and its top holdings include Taiwan Semiconductor Manufacturing at 14.01%, Samsung Electronics Ltd at 6.50%, and SK Hynix at 4.93%. This fund was launched in 2012. iShares Core MSCI Emerging Markets ETF has paid $1.80 per share over the trailing 12 months, which, on its recent ~$81.40 share price, works out to a 2.2% yield.

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Which looks like the better buy

When comparing the Vanguard FTSE Developed Markets ETF (VEA) and the iShares Core MSCI Emerging Markets ETF (IEMG), investors should consider several key factors. Let's see what they tell us about each fund.

First, we should examine each fund's strategy. VEA is a massive fund, holding nearly 4,000 stocks across dozens of countries. Its largest countries of allocation are Japan (21%), Canada (11%), and the United Kingdom (10%). IEMG, on the other hand, holds around 3,000 stocks. Its largest countries of allocation are Taiwan (29%), South Korea (19%), and China (17%). In short, VEA is a bit more geographically diverse, while IEMG tilts heavily toward East Asia.

Two other important factors are historical performance and income potential. Over the last five years, VEA has delivered a better total return. VEA has generated a total return of 57%, equating to a compound annual growth rate (CAGR) of 9.5%. IEMG, meanwhile, has delivered a total return of 45%, with a CAGR of 7.7%. As for income, VEA has a dividend yield of 2.4%, while IEMG's is 2.2%, giving VEA another slight advantage.

One final factor to weigh is cost. Here, VEA has an advantage, albeit a modest one. VEA's expense ratio is 0.03% -- near the bottom of what investors can hope to pay. IEMG's expense ratio is 0.09% -- still very affordable, but not as low as VEA's. For context, a person investing $10,000 in each fund should expect to pay $3 per year for their VEA shares and $9 per year for their IEMG shares.

In summary, VEA and IEMG are both international ETFs, but their differing strategies lead to major contrasts in their geographic allocation. VEA targets a broad international footprint, while IEMG is mainly focused on East Asian stocks. VEA has a lower expense ratio, although IEMG is far from expensive overall. All in all, some investors will likely select VEA given its combination of higher historical returns, lower expense ratio, and higher dividend yield. However, those investors seeking greater exposure to East Asian stocks may still want to consider IEMG, given its strategy and its reasonable fees.

Jake Lerch has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends ASML, Taiwan Semiconductor Manufacturing, and Vanguard FTSE Developed Markets ETF. The Motley Fool has a disclosure policy.