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. Investing

    Time to Bring Active Back into a Portfolio?

    While stocks have rallied since the economic recovery in 2009, many active portfolio managers have struggled to deliver investor returns in excess.
  2. Chart Advisor

    Now Could Be The Time To Buy IPOs

    There has been lots of hype around the IPO market lately. We'll take a look at whether now is the time to buy.
  3. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  4. Economics

    Long-Term Investing Impact of the Paris Attacks

    We share some insights on how the recent terrorist attacks in Paris could impact the economy and markets going forward.
  5. Chart Advisor

    Copper Continues Its Descent

    Copper prices have been under pressure lately and based on these charts it doesn't seem that it will reverse any time soon.
  6. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  7. Mutual Funds & ETFs

    Buying Vanguard Mutual Funds Vs. ETFs

    Learn about the differences between Vanguard's mutual fund and ETF products, and discover which may be more appropriate for investors.
  8. Mutual Funds & ETFs

    ETFs Vs. Mutual Funds: Choosing For Your Retirement

    Learn about the difference between using mutual funds versus ETFs for retirement, including which investment strategies and goals are best served by each.
  9. Mutual Funds & ETFs

    How to Reinvest Dividends from ETFs

    Learn about reinvesting ETF dividends, including the benefits and drawbacks of dividend reinvestment plans (DRIPs) and manual reinvestment.
  10. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  1. Should mutual funds be subject to more regulation?

    Mutual funds, when compared to other types of pooled investments such as hedge funds, have very strict regulations. In fact, ... Read Full Answer >>
  2. Do ETFs pay capital gains?

    Exchange-traded funds (ETFs) can generate capital gains that are transferred to shareholders, typically once a year, triggering ... Read Full Answer >>
  3. How do real estate hedge funds work?

    A hedge fund is a type of investment vehicle and business structure that aggregates capital from multiple investors and invests ... Read Full Answer >>
  4. Are Vanguard ETFs commission-free?

    While some Vanguard exchange-traded funds (ETFs) are available commission-free from third-party brokers, a large portion ... Read Full Answer >>
  5. Do Vanguard ETFs require a minimum investment?

    Vanguard completely waives any U.S. dollar minimum amounts to buy its exchange-traded funds (ETFs), and the minimum ETF investment ... Read Full Answer >>
  6. Can mutual fund expense ratios be negative?

    Mutual fund expense ratios cannot be negative. An expense ratio is the sum total of all fees charged by an asset management ... Read Full Answer >>

You May Also Like

Trading Center