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VWO vs IEMG: Which Is the Best Emerging Market ETF?

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We Compare VWO vs IEMG:

The Vanguard FTSE Emerging Markets ETF (VWO) and the iShares Core MSCI Emerging Markets ETF (IEMG) are two outstanding names in the category of emerging market ETFs.

These two prominent funds are also similar in terms of assets under management, expense ratio, and performance.

The most striking difference between these two emerging market funds is that IEMG includes South Korea while VWO does not.

In fact, the IEMG portfolio has over 13.6% exposure to South Korea, and that is because MSCI considers South Korea as an emerging market.

FTSE counts South Korea as a developed market, so VWO excludes it.

MSCI is the underlying index for IEMG while FTSE is the underlying asset for VWO.

A detailed look into the structure and components of these funds will help reach a conclusion between VWO vs IEMG.VWO vs IEMG Graphic

 

VWO vs IEMG: What’s The Difference?

The biggest difference between VWO and IEMG is their providers’ perception of certain countries as emerging markets or developing markets.

MSCI which is the provider for IEMG classifies South Korea as an emerging market, while FTSE classifies the same as a developed market.

FTSE includes South Korea in its developed market index and excludes it from its emerging market.

On the other hand, MSCI includes South Korea in its emerging market and not its developed market.

VWO vs IEMG Comparison

As a result, the composition of these two Emerging Markets ETFs differ.

The iShares Core MSCI Emerging Markets ETF (IEMG) is exposed to Korean stocks, while the Vanguard FTSE Emerging Markets ETF (VWO) is not.

 

VWO vs IEMG Performance

Over the past five years, IEMG and VWO have performed similarly.  IEMG has slightly outperformed VWO by 0.12% annually over the last 5 years.

Here is VWO and IEMG Performance:

VWO vs IEMG Performance Comparison

IEMG has outperformed VWO however, this comes with more volatility.

You can expect higher volatility from IEMG compared to VWO as you can see from their most recent performance.

 

VWO vs IEMG Holdings

VWO vs IEMG Holdings Comparison

More so, because VWO lacks exposure to Korean stocks it has more exposure to China, India, and Taiwan stocks.

IEMG has a 14% exposure to Korea, while VWO has no exposure to Korea.  VWO currently has 40% exposure to China, while IEMG has 31%.

Also, Taiwan composes 17.6% of VWO, compared to 15.6% of IEMG.

This is the primary discrepancy as VWO and IEMG have an almost identical fee of 0.10%, and 0.11% respectively.

In line with the similarities between the two, the two funds added Chinese A-Shares at different times.  The Vanguard fund started including them in 2015, while the iShares fund began adding them in 2018.

 

What’s an Emerging Market?

From an academic standpoint, an emerging market refers to a market or country that possesses some characteristics of a developed economy.  These markets are experiencing considerable economic growth and are evolving from “developing” to “developed” economies.

However, as it relates to 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 major point in VWO vs IEMG.

In line with 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 somewhat ironic since the S&P 500 index which is 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 as an emerging market until 2009 when it ‘promoted’ the country to a developed market.

However, MSCI points out several factors that disqualify 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.

 

VWO Description

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 acts as a benchmark to measure the return results of stock issued by companies in emerging market countries.

VWO Description

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, rather it is more exposed to China, Brazil, India, and the rest of the emerging nations.

 

VWO Top 10 Holdings

VWO Top 10 Holdings

Vanguard’s VWO is largely made up of Taiwan Semiconductor Manufacturing, Tencent, Alibaba, Meituan, and Reliance, and provides exposure to over 4,000 stocks.

 

IEMG Description

One of the core ETFs from BlackRock, iShares Core MSCI Emerging Markets ETF (IEMG) is an emerging market fund that is designed to track the investment returns of the MSCI Emerging Markets Investable Market Index.

MSCI’s emerging market index is all-cap emerging market equity.

IEMG Description

IEMG closely mirrors its underlying index, the MSCI index.  It invests almost all of its assets in the same securities as the underlying index.

MSCI counts South Korea as an emerging market instead of a developed market, so IEMG includes South Korea in its holdings.

However, the fund is designed in such a way to partially replicate the underlying index to allow for preferences in investing and keep tracking error low.

This is an investment strategy called representative sampling.

Lastly, the fund has exposure to India.  It invests a portion of the portfolio in India via a subsidiary from the Republic of Mauritius.

 

IEMG Top 10 Holdings

IEMG Top 10 Holdings

Blackrock’s IEMG is largely made up of Taiwan Semiconductor Manufacturing, Tencent, Samsung, Alibaba, and Meituan, and provides exposure to over 2,000 stocks.

 

Which Is Better: VWO vs IEMG?

Both VWO and IEMG are good investments.  Both have recorded strong performance and are highly liquid with over $80 billion in assets.

For investors that prefer passive investments, both VWO and IEMG are passive and track market-cap-weighted indices.

The big difference between the two tends to affect diversification which is a key strategy for better performance in investment.

In this case, both are diversified.

VWO is more exposed to China, India, and Brazil.

IEMG has more exposure to South Korea’s emerging markets.

VWO is a float-adjusted market-capitalization index and includes investments in Chinese A-shares, which are primarily designed for mainland Chinese citizens.

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No Minimum Investment

VWO and IEMG are both 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 IEMG commission-free.

  1. Vanguard to invest in VWO or Blackrock for IEMG
  2. M1 Finance to invest in either VWO or IEMG (Use this link for $50 when you open a new account)

Both of these options are free.  This is important because fees can lower our returns.

I like M1 Finance as the best option because it gives you the flexibility to purchase VWO, IEMG, and thousands of other stocks.

Here is your guide to making sure you get the M1 Finance $50 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 Retirement Fee Analyzer

Personal Capital’s free tools allow you to easily 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 IEMG Winner: BOTH

Both VWO and IEMG are popular emerging markets funds and have their advantages for investors.

However, with the strong performance in Korean equities, IEMG has a performance advantage over its counterpart, although it is worth noting that the difference between the two in terms of performance is slight.

In all, you’ll have to decide which emerging market ETF is best for you.

The decision between VWO or IEMG could come down to where you have your investment account.  If it’s Vanguard then VWO, if it’s Blackrock then IEMG.

 

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 with 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 continue to fade, emerging markets are most likely to 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 0.10% allowing investors to spend less on fees.

VWO is a good investment to consider for international exposure.  By investing in all emerging market equities it provides investors with a well-diversified portfolio.  This increases the chances for better returns and liquidity as well.

 


Disclaimer
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This information is my opinion and is for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.
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