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.

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