The answer may lie in your style of investing and time horizon.
- If your time horizon for holding a position is long, VWO is probably your best bet.
- If you want highest assurance of accurate and close tracking of the index, VWO is probably your best bet.
- If your time horizon is short with stop-loss protection, particularly if your position size is very large, EEM may currently be your best bet.
- If you are accumulating small amounts on a dollar cost averaging basis, then EEM through some dealers, such as Fidelity, may be your best bet.
- If you use options strategies with respect to either ETF, then EEM is a better bet.
Yesterday, Bloomberg put out an article stating that although EEM was first to market, VWO has caught up in size, putting them essentially neck-and-neck as of 1/20/2011 at $45.464 billion assets for VWO and $44.612 billion asset for EEM.
If VWO continues to grow at its recent pace, it will pull substantially ahead of EEM in asset size, which could in turn change the trading volume related choices.
Why Chose One Over the Other?
First, they are both fine products, but they do have differences that can be more or less important to various investors.
1. VWO has a lower expense ratio than EEM (0.27% versus 0.69%) that makes VWO a more attractive long-term holding.
2. VWO uses index replication whereas EEM using representative sampling – sampling has a higher probability tracking error than replication or near-replication – between the two methods, you get different individual stock weightings and different country weightings – VWO buys stock in the companies in the index – EEM buys stock in some of the companies in the index with at least 90% of its assets, and may use the other 10% to buy futures contract, options, and swaps, as well as cash to emulated the performance of the index (greater risk of under-shooting or over-shooting the index than simple replication)
3. EEM has a much higher average daily dollar turnover than VWO ($2.6 billion vs. $0.8 billion) making EEM more liquid for stop-loss orders which execute at market prices – the larger your position the more total daily dollar volume is important for market orders executing close to the stop trigger price
4. If you are doing dollar-cost-averaging, you should be in a no-load mutual fund, or a no-commission ETF (EEM is available commission-free at Fidelity and TD Ameritrade). We use Schwab as a our dealer, but they do not offer no-commission ETF trading – small investors doing dollar cost averaging and who wish to do so with ETFs are better served with a dealer that does not charge a commission on ETF trades (just imagine investing $100 per month with a $9 commission, or even $1,000 per month with a $9 commission – that is not good economics) – note there are some special conditions associated with commission-free trading that you should check out before going in that direction.
5. If you use options strategies, while neither EEM nor VWO have enough volume for good use in our view; EEM has substantially more volume than VWO however.
Moral of the story: Know what kind of investor you are and fit your emerging market fund choice to best fit your situation.
Holdings Disclosure: As of January 21, 2011 we hold positions in some but not all managed accounts for the following securities mentioned in this article: EEM, VWO
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