The Real Cost of Emerging Market Investing: VWO vs EEM

When it comes to finding the best emerging market funds, two names dominate the conversation: the Vanguard FTSE Emerging Markets ETF (NYSEARCA:VWO) and the iShares MSCI Emerging Markets ETF (NYSEARCA:EEM). At first glance, both ETFs seem to offer similar exposure to developing economies around the world. But a closer look at their fee structures reveals a dramatic difference that could impact your portfolio significantly over time.

The Fee Disparity: Where VWO Pulls Ahead

Here’s where things get interesting. VWO charges just 0.08% in annual expenses—meaning you’d pay only $8 per year on a $10,000 investment. EEM, by contrast, levies a 0.68% expense ratio, translating to $68 annually on the same amount. Over a decade, assuming both funds return 5% annually, this gap compounds dramatically: the VWO investor pays roughly $103 in total fees, while the EEM investor shells out around $859. That’s nearly $750 more for essentially the same exposure. This cost advantage alone makes VWO the clear winner among emerging market ETF options for most investors.

Portfolio Construction and Diversification

Both funds deliver substantial diversification, though through different lenses. VWO operates on a grander scale with $72.8 billion in assets under management and holds 4,680 stocks, with its top 10 positions representing just 20.1% of holdings. EEM, smaller at $20.3 billion in AUM, still offers solid exposure through 1,246 stocks, where the top 10 comprise 22.9% of assets.

Their geographic exposures align remarkably closely. Both funds load heavily on China (VWO: 31.8%, EEM: 29.6%), followed by India and Taiwan. However, one notable distinction emerges: EEM dedicates 12.5% of its portfolio to South Korean companies like Samsung, which VWO excludes. This reflects differing index methodologies—EEM’s benchmarks classify South Korea as an emerging market, while VWO’s does not.

The holdings overlap significantly for both funds, featuring companies like Taiwan Semiconductor (NYSE:TSM), Tencent (OTC:TCEHY), Alibaba (NYSE:BABA), Meituan (OTC:MPNGF), and India’s Reliance Industries. These are the companies most investors associate with emerging market growth.

Performance Track Record and Income Generation

Historically, neither fund has delivered spectacular returns as emerging markets have lagged developed counterparts. VWO shows approximately 0% annualized returns over three years, 2.2% over five years, and 3.5% over ten years. EEM presents a grimmer picture: -2.2% annualized over three years, 0.3% over five years, and 2.3% over a decade. This means VWO has consistently outperformed EEM across all measured periods.

On the dividend front, VWO provides a 3.5% yield, comfortably beating EEM’s 2.3%. For income-focused investors, this adds another reason to favor VWO.

Why Emerging Markets Still Matter

Despite lackluster recent performance, emerging markets warrant portfolio consideration. The International Monetary Fund forecasts 4.1% real GDP growth for emerging economies in 2024 versus just 1.4% for developed markets. Additionally, emerging market stocks trade at more attractive valuations—the typical emerging market stock carries an 11.7 P/E multiple compared to the S&P 500’s 20.3. With U.S. markets having surged 16.5% year-to-date through mid-year, emerging markets could represent a tactical buying opportunity as they attempt to catch up.

The Verdict

Both VWO and EEM provide comprehensive exposure to developing markets worldwide. VWO emerges as the superior choice for best emerging market funds, offering better historical performance, a higher dividend yield, and crucially, dramatically lower costs. That 0.60% expense ratio difference may sound trivial, but it compounds into meaningful wealth preservation over an investor’s lifetime.