The Vanguard Emerging Markets Fund (VEIEX and VWO) is a diversified emerging markets fund. VEIEX is a high risk, high returns stock index fund. It tracks the MSCI Emerging Market Index and, in eight of the past 10 years, has exceeded its peer average. The fund returned 29.71 percent of the one-year benchmark and 2.24 percent over the three-year benchmark. VEIEX’s low net expense ratio is just 0.32 percent. Vanguard Emerging Markets offers an ETF fund. The ETF version (VWO) tracks the FTSE Emerging Markets All Cap China A Transition Index.

Unlike traditional mutual funds, VEIEX is a passively managed fund. This index investment includes approximately 95 percent of net assets in plus or minus 480 common stocks of the Select Emerging Markets Free Index. As of the fund’s last filing, VEIEX performance ranked in the top nine percent (one year) and the top one percent over the three-year period. In this post, we discuss all you need to know about the Vanguard Emerging Markets Fund.

What Is the Vanguard Emerging Markets ETF (VWO)?

Vanguard is particularly known for its low-cost and wide variety of ETFs. VWO traces the same benchmarks as its index mutual fund. In general, ETFs offer more flexibility than traditional mutual fund investments.

  • Exchange-traded funds (ETFs) trade like common stocks on the stock exchange. In comparison, mutual fund investments are priced at the close of the trading day.
  • VWO, like other ETF investments, is intended for long-term investors. The decision to trade ETFs can increase commission costs or trigger the effect of taxes.
  • Markets rise and fall according to investor demand. Use pullbacks in the market to decrease the average cost of your investment.

5 Facts about the Vanguard Emerging Markets Fund

  • Vanguard Emerging Markets Fund is more volatile than the average market. It tracks a large emerging market index. For instance, it lost more than half its market value in 2008 but gained over three-fourths of it the next year.
  • VEIEX and VWO offer a consistent record over the past 10 years. Vanguard Emerging Markets Fund’s returns haven’t varied more than 300 basis points from the category average.
  • The expense of owning Vanguard Emerging Markets is relatively low compared to other emerging markets funds. Many have higher expense ratios of more than one percent. In comparison, VEIEX is inexpensive even for an index fund.
  • U.S. News ranked VEIEX number 33 out of 805 funds in the Diversified Emerging Mkts category. Zacks ranks VEIEX a ‘1’ or strong buy. Morningstar Research gives Vanguard Emerging Markets a three-star rating.
  • A dozen stocks represent more than 16 percent of VWO’s holdings. Country distribution (in rank order) includes China, Taiwan, India, Brazil, South Africa, Mexico, Russia, Malaysia, Thailand, and Indonesia.

5 Tips for Profiting from the Vanguard Emerging Markets Fund

  • It’s possible to buy one share of VWO on the stock exchange. There’s no minimum investment requirement. In comparison, Vanguard Emerging Markets Admiral Shares require a $10,000 investment. Vanguard Emerging Markets index fund requires a $3,000 initial investment.
  • VWO is a better choice for investors who want the freedom to liquidate shares on the stock exchange. However, don’t forget about broker commissions. If you add to VWO often, $10 per trade (or your broker-dealer’s commission fee) adds to the cost basis. In comparison, if you open a Vanguard brokerage account, it’s possible to buy VEIEX and VWO without commissions.
  • Emerging markets funds are riskier assets. VEIEX and VWO are likely to trend lower if local or broad emerging markets economies are soft. When things go well in the emerging markets, VEIEX and VWO will probably trade higher. During the 1988 to 2007 period, the top emerging market index of the day returned 17 percent plus per annum to investors. On a total return basis, investors earned almost 2,000 percent over 20 years.
  • Emerging markets investments can be exceptionally rewarding. But it’s important to know they carry elevated risk. Vanguard Emerging Markets offers investors a comparably safe way to gain exposure to emerging markets equities. Low cost ratios and portfolio diversification aside, consider limiting your exposure to an appropriate percentage of a balanced portfolio.
  • Emerging markets may be a place to contest the theory of efficient markets. In other words, the theory says that investors cannot beat the market because it’s so efficient. This seems logical when large U.S. stocks are considered. For instance, if AAPL has more than 50 analysts covering the company, can the individual investor discern something new about the stock?

More on Vanguard Emerging Markets Fund

Smaller stocks tend to have less coverage from research departments, the dedicated investor can dig for bargains in the small capitalization universe. Let’s extend the last thought a bit more. Fewer analysts understand or cover emerging markets equities. Emerging markets businesses aren’t always faced with regulatory disclosure requirements. Also, insider holdings are often hidden. Political changes in China and Russia seem unpredictable.

Because Vanguard Emerging Markets Fund reflects a broad base of emerging markets names and a low turnover rate, analysts aren’t cherry-picking from a select few names. Low turnover is another reason to own Vanguard Emerging Markets. Consider that when you buy and sell ABC, the spread between the buyer and seller price is about a penny. Even if you’re trading a very liquid stock in high daily volume, it’s possible for enough buyers and sellers to push the price of ABC in the wrong direction.

Summing It Up

Diversification in a high risk, high return environment benefits the investor. Modern Portfolio Theory shows the importance of portfolio variance. Generally, this increases the chance of capital appreciation. Stock market industries go in and out of favor. Some sectors rise in a down market and vice versa. Typically, bond holdings add portfolio income. In the current historically low-interest rate environment, investors have put more money into stocks in search of average seven percent annual bond yields of earlier decades.

Diversification in an uncertain and wide universe of emerging markets stocks adds safety. Most importantly, VWO and VEIEX also offer liquidity to Western investors. Low expense ratios and no commission charges (with a Vanguard account) make the Vanguard Emerging Markets Fund an attractive choice for investors seeking long-term capital growth potential.

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