More than a month ago, I discussed certain features of my slow but steady investing progress, and expressed concerns over owning two different ETFs that essentially track the same markets (EEM - iShares Emerging Markets ETF and VWO - Vanguard Emerging Markets ETF).
At that time, a few readers suggested that I should choose VWO over EEM because the former offers a lower expense ratio (0.3%) than the latter (0.76%).
In the process of educating myself on this subject, I came across an interesting article comparing the two ETFs in question.
Here is an excerpt from the article on Seeking Alpha:
Another thing in the article that I thought was strange was the author’s implication the VWO is a better choice, if you have to have emerging market exposure, than EEM because the expense ratio is a lot less. For the record VWO’s expense ratio is 0.30% (according to the article) and EEM’s expense ratio is 0.76% (according to Yahoo Finance). I think of this as forest for the trees analysis. At this point I will note that VWO has an OEF equivalent (VEIEX). Since VWO’s inception in March it has lagged EEM by at least 200 basis points (I am eyeballing the chart). For one year EEM looks to have outperformed the OEF equivalent by about 300 basis points. And for two years EEM seems to be ahead by about 1000 basis points. Even if the numbers are off, EEM has clearly outperformed by more than the expense ratio at every normal time interval since its inception.
The author seems to imply that EEM is a better performing ETF in spite of it’s higher expense ratio. I am still trying to find more information on this issue before I decide to go with one or the other ETF.
Meanwhile, I tried to check up the constituents of each ETF and found this article. Looks like there are differences in the weights these ETFs assign to different markets - although they may be tracking the same markets. That’s probably one of the reasons why there is a difference in their performance.
Any insights into this?
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It seems strange that two ETFs that are supposed to track the same index can have such differences. It also seems strange that each index takes a different approach to matching the index - sounds like active management to me!
The profile descriptions on Yahoo suggests that EEM attempts to provide similar performance to the MSCI emerging index while VWO tries to “track” it. There may be differences in how they deal with currency fluctuations. BTW EEM has underperformed VWO in the last year and YTD. I wouldn’t be worried about holding both if you already do.
It’s quite simple, EEM has been trading options much longer than VWO. Go over to finance.yahoo.com and look at the options table and volumes. You can buy LEAPS way into 2010 with EEM, VWO only gets you to June 2008.
Why would you want to limit your insurance buying (puts) or risk appetite (calls) with VWO when EEM is more enticing?
Investors are driving to where the “action is at” and EEM is where it’s at!
I don’t know what you guys were looking at. VWO has outperformed EEM in the last 2 years: http://finance.yahoo.com/charts#chart12:symbol=vwo;range=ytd;compare=eem
I would keep VWO and kick EEM to the curb. If they attempt to the do the same thing, then the differences should end up averaging out to over the long run. One could be higher than the other, but who knows? You do KNOW that EEM costs you more though, so why not take the sure bet?
The articles you googled up are not only old but the authors do not understand how ETFs work. When ETFs first start up, they do not perfectly track the index. When 20K shares are created from demand from investors, those 20K shares don’t track the index exactly because the transaction expenses would be too costly for small amounts. Instead, they might hold 1/3rd of the index. Then the next 20K shares buys the next 1/3rd. Finally another 20K buys the final 1/3rd. For obvious reasons, looking at an ETF the only 2 or 3 months after it’s been launched, you will not see it consistently track the index. Vanguard ETFs are semi-special since Vanguard can convert from open-ended fund to ETF and back (for big brokers) so even though the ETF doesn’t hold the same stocks as the index, it can be converted back to the mutual fund to switch back to the index. Over time, as more and more ETF shares are created, the shares begin to fully track the index. Now that it’s 2+ years after those articles were written, let’s look at the Yahoo graph - EEM, VWO and VEIEX track each other pretty good.
http://finance.yahoo.com/q/bc?s=EEM&t=5y&l=off&z=l&q=l&c=VWO,VEIEX
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MossySF: Yeah, I realized that both articles were published a while back; but you know, even now, I am getting conflicting reports on the right way to go about choosing one ETF over other.
I guess things that are obvious to some of you are not very obvious to me at all. Back to reading more material on this.
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