Emerging Markets Exposure |

Emerging Markets Exposure

I wanted to pass along the following article examining the differences between EEM and VWO. I’ll admit that I use EEM extensively and have traded and hedged and used options, although I currently have no position in either. Emerging markets are a big focus for some of our readers, so scroll down for the full story. The short summary is that EEM uses a sampling technique that can have a large tracking error to the index, it’s fees are relatively high, and it has a higher weighting to certain countries than the index.

Quick summary of differences:

Expense ratio: EEM 0.72% vs. VWO 0.27%
Depth of Holdings: EEM about 440 holding (57% of MSCI Emerging Markets Index) vs. VWO about 810 (more than the index)
Tracking error: well obviously a sampling method will have a higher tracking error than full replication.
Country exposure: there are some significant differences outlined.
Liquidity of options markets: EEM much more liquid and has a much deeper options markets (self-reinforcing?).

“For buy-and-hold investors utilizing plain vanilla strategies, VWO is superior to EEM in almost every way–lower expenses, lower tracking error, and better diversification. But EEM does offer significant advantages for some traders, most notably those who utilize options in an attempt to enhance returns or limit risk and depend on the ability to trade such contracts at or near their net asset value.”

For the full article, click here.

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