There are scores of exchange-traded funds (ETFs) dedicated to emerging markets equities, but when it comes to sheer size, the king is the Vanguard Emerging Markets Stock Index Fd (NYSEARCA:VWO). At the end of February, VWO had a whopping $68 billion in assets under management, making it not only the largest emerging markets ETF, but one of the largest ETFs of any type.
Unlike some of its direct competitors, VWO does not track the MSCI Emerging Markets Index. Instead, the fund follows the FTSE Emerging Markets All Cap China A Inclusion Index. That hints at one of the big differences between this ETF and other emerging markets ETFs.
MSCI Inc (NYSE:MSCI), the index provider behind the namesake index, is still working with global investors to include China’s A-shares — the stocks trading on mainland exchanges in Shanghai and Shenzhen — in its international indexes.
Other index providers have already done so, meaning VWO has been gradually increasing its exposure to the stocks trading in mainland China. Top holdings include China Mobile Ltd. (ADR) (NYSE:CHL) and Tencent Holdings Ltd (OTCMKTS:TCEHY).
China Isn’t The Only Difference
Another noteworthy difference between VWO and funds tracking the MSCI Emerging Markets Index is exposure to South Korea. MSCI still classifies Asia’s fourth-largest economy as an emerging market while FTSE Russell, this Vanguard fund’s index provider, labeled South Korea as a developed market several years ago.
Perhaps surprisingly, volatility differentials between VWO and the MSCI Emerging Markets Index are not significant. I say surprising because South Korea is one of the least volatile emerging markets. Over the past three years, the Vanguard ETF’s annualized volatility has been almost identical to that of the MSCI Emerging Markets Index.
Returns, however, have not been identical. Over that period, VWO is up 3.4% while the MSCI Emerging Markets Index is down 1.1%.
VWO features one of the largest lineups among emerging markets ETFs, as its portfolio includes more than 4,200 stocks. Chinese stocks account for 28.6% of the ETF’s weight, while Taiwan is the second-largest country weight at almost 16%. India and Brazil combine for about 21%.
In addition to being the largest emerging markets ETF, Vanguard FTSE Emerging Markets is known for something else: Being one of the least-expensive of those ETFs. VWO’s annual fee is just 0.14%, or $14 on a $10,000 investment. That makes it cheaper than 90% of competing funds, according to Vanguard data.
Although VWO’s low fees make it a favorite of cost-conscious retail investors, its size confirms the ETF has a large professional following. The result is impressive liquidity with an average bid/ask spread of just 1 cent over the past 30 days, according to Vanguard data.
As of this writing, Todd Shriber was long VWO.
