Why VWO Is the Better Emerging Market ETF

What's the hottest topic in the investment world? And by extension, what's the premier discussion on ETFs today?

Answer: Emerging market exposure.

Just about every provider has a version or three. State Street has a number of emerging market regions, though its pan-emerging market fund is the S&P SPDR Emerging Market (GMM). The longest-running investment in town is Barclay's iShares MSCI Emerging Market Index Fund (EEM) and the most recent player is WisdomTree's High-Yielding Emerging Market Index Fund (DEM).

Each of the funds above have pros, cons, advantages, disadvantages and distinctions that make them somewhat unique. GMM has a 20% weight in financials with significant country weightings in China and Brazil. Its major drawback is the insanely low trading volume.

The EEM is well-diversified across sectors, but has a decided tilt towards Asian emerging markets. South Korea and Taiwan are prominent players. The volume is regularly in the millions... no problem there. Yet the cost of 0.75% flies in the face of the ETF low cost mandate.

The DEM is well-diversified across sectors, though the top sector is not financials. In fact, unlike the others mentioned, financials is not even in the top 3! (That would be Materials, Energy and Telecom.) A whopping 27% is allocated to Taiwan... which may be a cause for concern for some people. Yet a 6.5% expected dividend yield is rather enticing.

Now let me tell you why I like the Vanguard Emerging Market Fund (VWO) more than the competition. For starters, can any of the broader based emerging markets genuinely distinguish themselves across so many regions and so many sectors? The charts seem to say... not really.

So the real decision for pan-emerging market exposure would then come down to ease of trade and cost. EEM is the easiest to trade, but it is the most expensive at 0.75%. The next easiest to trade based on volume is also the low-cost leader, the Vanguard Emerging Market Fund (VWO). VWO is a mere 0.30%.

At this point and at the enormous rates of return that emerging markets have generated, a 0.45% edge for Vanguard's VWO may not be evident. Yet there's little reason to stick with EEM if you're going to get essentially the same stuff.

WisdomTree ups the ante quite a bit with a 6.5% dividend yield on DEM. If you can tolerate low volume in a high volatile arena, if you are comfortable with a 27% Taiwan weighting, the argument for DEM may be compelling over time.

[click on image to enlarge]

Comments

[Ralph F:]

Excellent article. If the chart is basically the same for all three, then doesn't DEM win out due to the dividend?

2007 Sep 02 05:42 PM

[David Jackson:]

What's DEM's expense ratio?

2007 Sep 04 02:09 PM

[Ralph F:]

0.63%

2007 Sep 04 02:12 PM

[Ralph F:]

BTW, that's slightly lower than the iShares MSCI Taiwan Index Fund (EWT), which Barclays' web site says has an expense ratio of 0.70%.

2007 Sep 04 02:15 PM