The evolution of the ETF universe has spawned dozens upon dozens of innovative offerings that make it easy and cost-effective to tap intostrategiesand asset classes that were previously out-of-reach for mainstream investors. With over 1,400 exchange-traded funds to chose from, and new launches every month, some investors might feel a littleintimidatedwhen it comes time to picking a product that best suits their needs. Investors looking to tap into emerging markets have more than a handful of options to choose from, with some taking a broad-based approach while others deliver country-specific exposure .

In this head-to-head battle, we will consider two of the most popular funds from theEmerging Markets Equities ETFdb Category; meetVanguard's MSCI Emerging Market ETF (VWO) and iShares's MSCI Emerging Markets Index Fund (EEM) .

The Contenders

At present, VWO takes home the prize when it comes to popularity. This offering from Vanguard has accumulated over $58 billion in assets under management since launching on March 4, 2005. The underlying index for this ETF is the well-known MSCI Emerging Markets Index, which looks to measure the performance of a broad universe of emerging market stocks.

The iShares offering on the other hand, EEM, has accumulated over $37 billion in assets under management since launching on April 7, 2003. Investors should note that this ETF tracks the same MSCI index as VWO, although a closer look under the hood of eachrevealssome noteworthy differences.

Appeal & Best Fit

Emerging markets equities have found their way into countless portfolio as ETFs have made it easy to tap into this lucrative asset class. The appeal behind investing in this segment of the global market is fairlystraightforward; emerging markets are known for their favorable demographic trends, increasing rates of urbanization, and ultimately their superior economic growth rates when compared to developed market counterparts .

A broad-based allocation to emerging markets equities makes sense for a number of portfolios. Conservative investors may view this asset class as more of a compliment to their existing equity component given the riskier nature of these securities. On the other hand, more and more investors are including emerging markets as core holdings since this asset class has demonstrated the ability to deliver truly impressive returns withmanageablerisk.

Under The Hood

Although both VWO and EEM track the same MSCI Emerging Markets Index, a difference in their respective strategies results in some noteworthy differences .

VWO's portfolio consists of 891 stocks while EEM holds only 856. Furthermore, the top 10 allocations in each ETF are similar, but not identical. So where's the disconnect? BecauseEEM uses a sampling strategy to achieve its investment objective, this ETF generally won't hold all of the components of the underlying index, but rather will attempt to construct a smaller portfolio that will closely correspond to the results of the complete benchmark. Bycomparison, VWO employs a full replication strategy; this means that the ETF willessentiallyhold every component in the underlying benchmark .

From a sector breakdown perspective, the top three allocations in each ETF are identical; financial servicesreceivethe greatest allocation followed by fairly equal distributions across thetechnology, basic materials and energy sectors. From a geographic perspective, the top three allocations by country are also identical; China, South Korea, Brazil and Taiwan receive major allocations.

Expenses & Performance

The biggest difference between these two seemingly identical ETFs lies in their expense ratios. EEM charges a steep 0.67% annual expense ratio while its competitor, VWO, costs a mere 0.20%. This difference in cost may seem trivial to shorter-term traders, however, over the long-haul, VWO is essentially guaranteed to outperform EEM .

To illustrate this point, consider the historical performances of each ETF in 2008, 2009, 2010 and 2011; over this time period, VWO has returned -52%, 75%, 19% and -18% respectively. In this same time period, EEM has managed to return -48, 68%, 16% and -18% respectively. As you can see, the differences in expenses and full replication versus sampling strategy result in material impacts on bottom line returns over time.

The Bottom Line

For cost-conscious, buy-and-hold investors looking to tap into a broad emerging markets index, VWO is certainly the superior offering given its attractive price tag and full replication strategy. Lower tracking error and better diversification make Vanguard's ETF hard to pass up for those in it for the long-haul.

Nonetheless, EEM holds greater appeal among active traders who value liquidity above all else. The iShares offering features a much more liquid options market, which likely appeals to more sophoiscated traders looking to employ any number of advanced strategies over a shorter time horizon.

Follow me on Twitter@SBojinov

Disclosure: No positions at time of writing.

Related Articles
  1. Chart Advisor

    3 Ways to Trade the Rising Volatility

    With volatility increasing in the markets, many are turning to these three volatility-capturing exchange-traded products.
  2. Mutual Funds & ETFs

    ETF Analysis: iShares US Basic Materials

    Learn about the iShares US Basic Materials exchange-traded fund, which invests in the equities of chemicals, metals and industrial gas companies.
  3. Mutual Funds & ETFs

    ETF Analysis: Ultra Oil & Gas

    Find out more about the ProShares Ultra Oil & Gas exchange-traded fund, the characteristics of the ETF and the suitability and recommendations for the fund.
  4. Mutual Funds & ETFs

    ETF Analysis: PowerShares DB Commodity Tracking

    Find out about the PowerShares DB Commodity Tracking ETF, and explore a detailed analysis of the fund that tracks 14 distinct commodities using futures contracts.
  5. Mutual Funds & ETFs

    ETF Analysis: PowerShares FTSE RAFI US 1000

    Find out about the PowerShares FTSE RAFI U.S. 1000 ETF, and explore detailed analysis of the fund that invests in undervalued stocks.
  6. Mutual Funds & ETFs

    Comparing ETFs Vs. Mutual Funds For Tax Efficiency

    Explore a comparison of mutual funds and exchange-traded funds, or ETFs, and learn what makes ETFs a significantly more tax-efficient investment.
  7. Mutual Funds & ETFs

    ETF Analysis: Vanguard Small-Cap Value

    Find out about the Vanguard Small-Cap Value ETF, and explore detailed analysis of its characteristics, suitability, recommendations and historical statistics.
  8. Mutual Funds & ETFs

    ETF Analysis: Vanguard Intermediate-Term Corp Bd

    Learn about the Vanguard Intermediate-Term Corporate Bond ETF, and explore detailed analysis of the fund's characteristics, risks and historical statistics.
  9. Insurance

    Whole or Term Life Insurance: Which Is Better?

    Learn the difference between term life insurance and whole life insurance. Understand when it is beneficial to buy each type of life insurance.
  10. Mutual Funds & ETFs

    ETF Analysis: iShares 10-20 Year Treasury Bond

    Learn about the iShares 1-20 Year Treasury Bond ETF and its holdings, and understand why investors may be better served to look at other bond funds.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  3. Exchange-Traded Mutual Funds (ETMF)

    Investopedia explains the definition of exchange-traded mutual ...
  4. Fractal Markets Hypothesis (FMH)

    An alternative investment theory to Efficient Market Hypothesis ...
  5. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  6. Sucker Yield

    When an investor has essentially risked all of his capital for ...
RELATED FAQS
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>
  5. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>
  6. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!