ETF Talk: Consider This Emerging Markets ETF

The Vanguard FTSE Emerging Markets ETF (NYSE: VWO) invests in stocks of companies located in emerging markets around the world.

The fund’s goal is to track the return of the FTSE Emerging Markets All Cap China A Inclusion Index. Thus, VWO’s investment strategy is to hold a broadly diversified collection of securities that mimic the key characteristics of the market-capitalization-weighted FTSE China A Inclusion Index, which consists of 3,550 stocks of large, mid-size and small companies in emerging markets around the world.

The fund’s top holdings include Tencent Holdings Ltd. (OTCMKTS: TCEHY), Taiwan Semiconductor Mfg. Co. Ltd. (NYSE: TSM), Alibaba Group Holding Ltd. (NYSE: BABA), Naspers Limited (OTCMKTS: NPSNY), China Construction Bank Corporation (OTCMKTS: CICHF), Industrial and Commercial Bank of China (OTCMKTS: IDCBY), Ping An Insurance Group Co. of China (OTCMKTS: PNGAY) and China Mobile Ltd. (NSY: CHL). These stocks make up 20.20% of the fund’s total assets.

The fund’s investments are mostly in Asia, including 34.7% in China, 14.1% in Taiwan, 11.7% in India, 4.0% in Thailand and 3.2% in Malaysia. VWO also invests in other emerging market nations, such as Brazil, with 8.5% of its assets, 6.8% in South Africa and 3.8% in Russia.

The ETF currently has $77.8 billion in net assets and an expense ratio of 0.14%, so it is relatively cheap to hold in comparison to other exchange-traded funds. Indeed, its expense ratio is 90% lower than the average expense ratio of funds with similar holdings.

However, Vanguard rates the level of risk in this ETF five out of five, meaning that it is quite risky for investors. This is not surprising because not only are foreign stocks more volatile and less liquid than American stocks, but investing in emerging markets is inherently riskier than investing in more developed economies, since emerging markets often have less developed legal, tax and regulatory systems.

In addition, this fund’s heavy investment in current global “hot spots,” such as China and Taiwan, as well as in countries such as Brazil that have elected populist candidates, indicates the fund has taken on additional risk.

Long-term investors who are looking for exposure to emerging markets should consider this fund, which also is a good way to add international diversity to a portfolio. As always, investors should exercise their due diligence in deciding whether VWO is a worthwhile investment.

As always, I am happy to answer any of your questions about ETFs, so do not hesitate to send me an email. You just may see your question answered in a future ETF Talk.