EEM Vs VWO: Country Tilts Mean Little

June 17, 2016

One of the main reasons we often tout the idea that you should look closely under the hood of any ETF you choose within a segment is because differences in the makeup of a portfolio will lead to differences in total returns. Sometimes, however, those return differences aren’t quite apparent despite sizable portfolio tilts.

That’s been the case in the two largest emerging market ETFs in the past year. The iShares MSCI Emerging Markets ETF (EEM | B-100) and the Vanguard FTSE Emerging Markets ETF (VWO | B-96) have delivered nearly identical returns in the last 12 months: 

In broad terms, the biggest difference between these two takes on emerging markets is that EEM includes South Korea in its country mix, while VWO excludes it. In fact, the country is EEM’s second-largest allocation, with a nearly 15% weighting. In VWO, the No. 2 spot is Taiwan, at 14%.

Both funds allocate most heavily to China—EEM at 25% and VWO at 27%—but the makeup of those allocations is somewhat different.

VWO is now in the process of adding China A-shares to its mix following FTSE’s 2015 decision to add those securities to its emerging market benchmark. That’s a transition that is still ongoing, and that amounts to nearly 6% of the portfolio. VWO does not, however, include U.S.-listed China stocks such as Alibaba.

EEM, on the other hand, excludes A-shares, and will continue to do so following MSCI’s decision to forgo China mainland stocks in its emerging market index for the time being. EEM does own exposure to Chinese companies such as Alibaba, which are listed in the U.S., but it doesn’t offer access to mainland China stocks.

When Differences Don’t Matter

Despite these differences, these funds’ performances have been nearly identical this past year. That’s because South Korea hasn’t done all that much to impact EEM’s performance in any significant way.

High correlations between the larger emerging markets is affecting these funds, making the U.S dollar the biggest driver of returns over the past 12 months. The dollar has been in a downtrend in recent months.  

“Currency tends to dominate over the short and medium term, and it’s a fact common to all country components,” said Mark Dow, founder of Dow Global Advisors, based in Laguna Beach, California. He is also the author of the Behavioral Macro blog.


Like It Or Not

“More generally, people talk a lot about differentiation, but in practice, there is much less of it than the fundamentals suggest there should be. People tend to either ‘like’ EM [emerging markets] or not, and allocate accordingly,” he said.

If portfolio differences aren’t having much of an impact this year when it comes to returns, that hasn’t always been the case. Consider EEM and VWO’s performance disparity of more than 3.5 percentage points in 2014:

Charts courtesy of

“There have been years like 2014 when the records between the two were unique,” S&P Global’s ETF expert Todd Rosenbluth said. “As such, investors cannot just buy the cheapest or most actively traded ETF, in our opinion.”

The $22 billion EEM carries a 0.69% expense ratio—more than four times as expensive as VWO, which costs 0.15%. EEM is the smaller of the two in terms of total assets and in terms of portfolio size—it holds less than 900 stocks.

But EEM is hugely liquid, trading more than $2.1 billion in average volume every day, with a spread of about 0.03%.

VWO, the larger of the two, with nearly $36 billion in assets and more than 3,400 holdings, trades about a quarter of that daily volume, or some $520 million on average a day. Its trading spread is equally reasonable, at 0.03%.

To Rosenbluth’s point, what makes EEM and VWO different isn’t really showing up in the charts this year, but if history is any indication, it eventually will, and investors need to pick the ETF that best fits their views on emerging markets.

Contact Cinthia Murphy at [email protected].


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