We Compare VWO vs EEM:
We'll compare two popular emerging market ETFs: the Vanguard FTSE Emerging Markets ETF (VWO) and the iShares MSCI ETF (EEM).
Before we dive into the comparison, let's first understand what ETFs are and why they are popular among investors.
ETFs are a type of investment fund that trades on a stock exchange.
They are similar to mutual funds in that they offer investors a diversified portfolio of stocks but differ in that they trade like a stock. ETFs can be bought and sold throughout the trading day, making them a flexible and easy-to-use investment option.
Now let's compare VWO and EEM.
VWO vs EEM
The main difference between VWO and EEM is the company that offers the exchange-traded fund (ETF). VWO is offered by Vanguard, while Blackrock offers EEM. Another significant difference is the number of stocks in each, with VWO having 4,377 different companies in the index compared to 1,228 with EEM.
They also have different expense ratios.
VWO expense ratio 0.08%
EEM expense ratio 0.68%
VWO is a fund offered by Vanguard that seeks to track the performance of the FTSE Emerging Index.
This index includes large- and mid-cap stocks from 27 emerging market countries, including China, Taiwan, Brazil, South Africa, and India. The fund has an expense ratio of 0.08%, which is relatively low for an emerging market ETF.
VWO uses a full-replication strategy to hold all the securities in the index. This gives investors a more accurate representation of the index's performance but may increase trading costs.
EEM is a fund offered by iShares that seeks to track the performance of the MSCI Emerging Markets Index.
This index includes large- and mid-cap stocks from 26 emerging market countries, including China, South Korea, Taiwan, India, and Brazil. The fund has an expense ratio of 0.68%, higher than VWO's expense ratio.
EEM uses a sampling strategy, which means it holds a representative sample of the securities in the index. This reduces trading costs but may result in some deviation from the index's performance.
As you can see from the chart above, there are significant differences between VWO and EEM.
VWO vs EEM Performance
Over the past five years, EEM and VWO have performed similarly. VWO has slightly outperformed EEM by 2% annually over the last 5 years.
Here is VWO and EEM Performance:
VWO has outperformed EEM; however, this is not a predictor of future returns.
You can expect higher volatility from EEM compared to VWO, as seen from their most recent performance.
VWO vs EEM Holdings
Country Exposure: While both funds invest in a broad range of emerging market countries, there are some differences in their country exposure.
For example, VWO has a larger exposure to China, while EEM has a larger exposure to South Korea.
When choosing between the two funds, investors may want to consider their preferences for country exposure.
What’s an Emerging Market?
From an academic standpoint, an emerging market refers to a market or country with some characteristics of a developed economy. These markets are experiencing considerable economic growth and are evolving from “developing” to “developed” economies.
However, regarding investment, the term “Emerging Market” does not have a one-size-fits-all definition.
The definition depends on varying perceptions, which in the first place, is the underlying factor for the significant point in VWO vs EEM.
In line with the national GDP, the International Monetary Fund ranks South Korea as the tenth-largest economy in the world. The Korean stock market is also the fourteenth largest stock market in the world by market capitalization.
Yet, the MSCI has classified South Korea as an emerging rather than a developed economy.
This is ironic since the S&P 500 index, a top benchmark index for the US stock market, has acknowledged the country as a developed market for over twenty years.
FTSE considered South Korea an emerging market until 2009, when it ‘promoted’ the country to a developed market.
However, MSCI points out several factors disqualifying South Korea as a developed market.
These include the lack of offshore currency and the recent ban on short selling to curb the effects of the pandemic, which affected investors.
Launched in April 2005, Vanguard FTSE Emerging Markets ETF (VWO) is one of the earliest ETF products of the second largest investment company in the world, Vanguard.
The fund seeks to track the performance of the FTSE Emerging Markets All Cap China A Inclusion Index using the indexing investment strategy.
This index is a benchmark to measure the return results of stock issued by companies in emerging market countries.
VWO became an FTSE index in 2013, automatically excluding South Korea from its holdings, as the index doesn't classify South Korea as an emerging market country.
The fund soon added another characteristic in November 2015, including China A-shares and small-cap stocks, to its holdings.
As a result of these changes, VWO has no exposure to South Korea; instead, it is more exposed to China, Brazil, India, and the rest of the emerging nations.
VWO Top 10 Holdings
Vanguard's VWO comprises Taiwan Semiconductor Manufacturing, Tencent, Alibaba, Meituan, and Reliance and provides exposure to over 4,000 stocks.
One of the core ETFs from BlackRock, iShares MSCI Emerging Markets ETF (EEM), is an emerging market fund designed to track the investment returns of the MSCI Emerging Markets Index.
MSCI's emerging market index is all-cap emerging market equity.
EEM closely mirrors its underlying index, the MSCI index. It invests almost all its assets in the same securities as the underlying index.
Blackrock's EEM includes large- and mid-cap stocks from 26 emerging market countries, including China, South Korea, Taiwan, India, and Brazil.
The fund has an expense ratio of 0.68%
EEM Top 10 Holdings
Blackrock's EEM comprises Taiwan Semiconductor Manufacturing, Tencent, Samsung, Alibaba, and Meituan and provides exposure to over 1,000 stocks.
Which Is Better: VWO vs EEM?
Both VWO and EEM are good investments for exposure to emerging markets. However, they have underperformed compared to U.S. markets over the last decade.
VWO and EEM are passive and track market-cap-weighted indices for investors that prefer passive investments.
The big difference between the two is the expense ratio.
VWO has a lower expense ratio than EEM. For investors who prioritize low expenses, VWO may be the better choice.
No Minimum Investment
VWO and EEM are exchange-traded funds (ETFs), so there is no minimum investment. Investors looking to buy fractional shares can use platforms like M1 Finance.
Normally, fractional shares are not available for ETFs, but with M1 Finance, you can purchase fractional shares with no commission.
Buying fractional shares allows you to maximize your investment.
There are two easy ways to invest in VWO or EEM commission-free.
- Vanguard to invest in VWO or Blackrock for EEM.
- M1 Finance to invest in either VWO or EEM (Use this link for $100 when you open a new account)
Both of these options are free. This is important because fees can lower our returns.
M1 Finance is the best option because it lets you purchase VWO, EEM, and thousands of other stocks.
Here is your guide to getting the M1 Finance $100 Bonus.
I also use Personal Capital to track my investment fees. They have a free Retirement Fee Analyzer that tells you the future impact of fees on your portfolio.
Personal Capital's free tools allow you to quickly find which of your investments has high fees so that you can switch them to low-cost options. (Get a $20 Amazon Gift Card with this link when you add at least one investment account containing a balance of more than $1,000 within 30 days)
VWO vs EEM Winner: VWO
VWO and EEM are popular emerging market funds and have advantages for investors.
However, with better performance and a lower expense ratio, the winner is VWO.
You'll have to decide which emerging market ETF is best for you.
The decision between VWO or EEM could be determined by where you have your investment account.
If it's Vanguard, then VWO. If it's Blackrock, then EEM.
Is VWO a Good Investment?
VWO is an emerging market ETF and stands out for diversification, low cost, and growth potential. Let's look at how each of these factors impacts.
- Diversification: VWO tracks the FTSE Emerging Markets All Cap China A Inclusion Index and invests in the same securities as the index. As a result, VWO is a well-diversified ETF and includes investments in the Chinese A-shares. The fund holds over 4,000 securities across relevant industries in the global economy, including financials and technology. VWO also has exposure to most emerging market countries, including China.
- Strong Growth Potential: As post-pandemic regulations fade, emerging markets will likely experience further economic growth. Also, the continuous increase in the prices of commodities is another strong hint that there will be more boost to economic growth.
- Low-Cost: As with almost all Vanguard products, VWO is an inexpensive investment option. The expense ratio is 0.08% allowing investors to spend less on fees.
VWO is an excellent investment to consider for international exposure. Investing in all emerging market equities provides investors with a well-diversified portfolio. This increases the chances for better returns and liquidity as well.