VWO – Fund for Foreign Emerging Market Exposure

In my earlier post, I provided a shortlist of candidates for index-based exchange traded funds to capture the general market performance of emerging markets. These ETF-based funds are VWO, EEM, DEM, BKF, and BIK. While the shortlist provided a good starting point, in this post I am reviewing the suitability of these funds against the investment objective. The investment objective is to capture the general performance of emerging markets. I did not consider reviewing BIK, since it was invested only in 40 corporations in Brazil, China, Russia, and India.

Review of ETF Structure

Table 1, Table 2, and Table 3 provides the quantitative summary of the structure of all four funds.

Funds VWO and EEM are based on MSCI Emerging Markets Select Index which is market capitalization based index. It is invested in 18 to 20 emerging countries where stocks can be bought free of any restrictions.

  • VWO and EEM follow the same MSCI index hence, almost 60% of the both funds assets are invested in five countries (Brazil, South Korea, China, Taiwan, and South Africa).
  • VWO’s 60% assets are invested in 130 corporations of which none seems to be in ADR/GDRs. While EEM’s 60% assets are invested in only 42 corporations of which 29 stocks are in the form of ADR/GDRs.
  • As the table shows, VWO is invested in 784 stocks with expense ratio of 0.24%, while EEM is invested in only 342 securities with expense ratio of 0.72%.
  • Close of 20% of both fund’s assets are invested in financial sector.
  • What I find intriguing is why these funds are different in structure when they are based on same index. EEM is investing most its assets in ADR/GDR (not native corporation’s country), less number of corporations, and still has three times the expense ratio than VWO. We will analyze if market performance justifies this higher expenses.

DEM is not a pure index fund in a sense that it does not follow any generally accepted market capitalization based indexing. It is an index which is based on fundamentals and corporations which pay cash dividends. At the index measurement date, companies within this index are ranked by dividend yield. Securities ranking in the highest 30% by dividend yield are selected for inclusion. Companies are weighted in the Index based on annual cash dividends paid.

  • DEM is invested in 18 emerging countries and 296 corporations, and has an expense ratio of 0.62%.
  • Approximately 60% of its assets are invested 43 corporations in five countries (Taiwan, South Africa, Malaysia, and Taiwan). While the asset concentration is similar to VWO and EEM, the countries are different. Almost 30% of DEM assets are concentrated in Taiwan alone.
  • DEM seems to be investing in corporation’s native country with only two or three stocks in the form of ADR/GDR.
  • Approximately 20% of the fund is concentrated in financial sector

BKF is market capitalization based index fund designed to follow MSCI’s BRIC Index. It is designed to focus only on four BRIC countries.

  • BKF is invested 176 corporations out of which 34 are in the form of ADR/GDR.
  • Approximately 60% of its assets are invested in only 23 corporations. With such a high concentrated position in only four countries and 23 corporations, I do not understand the rationale for expense ratio of 0.72%.
  • Although the fund is focused on four large emerging markets, it has invested only 60% of its assets in only 23 corporations.
  • Approximately 23% of fund assets are in financial sector.


Table 1: General Information

Table2: Country Allocation

Table2: Country Allocation

Table 3: Industry Sector Allocation

Table 3: Industry Sector Allocation

Market Performance (See Chart)

Knowing how these four funds are structured, the next step is to look at the market performance of these four funds.

  • VWO and EEM were introduced in early 2005. The chart shows very similar performance since March 2005. In fact both funds are almost tracking each other. Interestingly, both funds are almost at the same level relatively to their point of introduction in 2005.
  • DEM and BKF were introduced mid-to-late 2008. Therefore, it would be prudent to look at relative performance from that point onwards. The second chart shows this relative comparison since middle of 2007. DEM is down by 43%, EEM is down 51%, VWO is down 56%, and BKF is down 59%.
  • Table 1 shows VWO and EEM have higher asset base and relatively higher trading volume. While DEM and BKF have very low asset base and lower trading volume.
  • Table 1 also shows that VWO, EEM, and BKF have higher volatility (Beta approximately 1.4). On relative basis, DEM has lower volatility (Beta is 1.24).

VWO and EEM Relative Performance

Relative Performance (VWO, EEM)

Relative Performance (VWO, EEM, DEM, BKF)

Relative Performance (VWO, EEM, DEM, BKF)


So far we have looked at the structure of these funds and their relative market performance in last few years. The next step is to interpret these funds vis-à-vis the objective of investments.

  • Looking at this relative comparison from a narrow viewpoint, our natural instinct will tell us that DEM’s performance is much better, followed by EEM, and then VWO.
  • BKF does not seem to justify the high expense when it is under performing, investing in most of its assets only in 23 corporations, and has a very low trade volumes.
  • The financial cycle and/or dividend declaration of majority of corporations in emerging market is not yet complete for year 2008. Investors will need to watch how this changes with declaration of 2008 financial results sometime by April or June 2009. In addition, investors need to realize that DEM has 30% of its asset invested in Taiwan alone. It adds to the risk factors. In addition, DEM is also not a typical dividend based investment that provides regular dividend income. The notion here is that corporations paying cash dividends are fundamentally strong and will have better performance. The dividend paid by DEM is more or less similar to VWO and EEM. Having said that, DEM is a good fit for investors looking at taking relative higher risk in order to beat the general market index.
  • DEM has a potential to be a long term investment in emerging markets. At this point in time, investors should continue to watch DEM and see how it evolves with changing economic environment in emerging markets.
  • VWO and EEM are two funds which have good coverage of emerging markets and have similar performance since 2005. Although their structure is little bit different, EEM is able to achieve performance similar to VWO.

In Conclusion…

VWO with its low expense ratio (and similar performance to EEM) is a good fit for investors who are looking to capture the general market performance of emerging markets. It is also trading at price levels that are similar to its introduction price point in 2005.

At the time of this writing, no position in any of above funds. I may initiate a long position in VWO in next few days.

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