Comparing the Emerging and Developed Markets

Both the iShares Core MSCI Emerging Markets ETF (NYSEMKT:IEMG) and iShares Core MSCI EAFE ETF (NYSEMKT:IEFA) are designed as core holdings for international diversification, but IEMG targets emerging markets while IEFA invests in developed markets outside North America. This comparison examines cost, recent performance, volatility, and portfolio construction to help investors decide which fund best fits their global allocation goals.

Beta measures price volatility relative to the S&P 500; beta is calculated from five-year weekly returns. The 1-yr return represents total return over the trailing 12 months.

IEMG has outperformed IEFA over the past 12 months, but IEFA has the higher dividend yield, with both funds having similar expense ratios.

IEMG has delivered a stronger one-year total return, but over five years, IEFA’s steadier ride led to higher cumulative growth and a shallower drawdown. IEFA’s lower volatility may matter for risk-sensitive investors.

IEFA tracks developed markets outside the U.S. and Canada, offering access to 2,589 holdings, with financial services (22%), industrials (20%), and healthcare (11%) as the top sectors. Its largest positions include ASML Holding N.V. (AMS:ASML.AS), Roche Holding AG (SIX:ROG.SW), and HSBC Holdings Plc (LSE:HSBA.L). With a 13-year track record, its international focus tends to lean towards companies in Europe and Asia.

Launched on the same day as IEFA on Oct. 18, 2012, IEMG holds 2707 emerging-market stocks, tilting a lot more towards the tech sector. Its top holdings are Taiwan Semiconductor Manufacturing (2330.SR), Samsung Electronics Ltd (005930.KS), and Tencent Holdings Ltd (0700.HK), giving it more exposure to Asian tech giants.

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When comparing these two ETFs, they reveal common patterns in financial markets between emerging and developed markets. With emerging markets, there’s often more volatility with these types of stocks, as they’re newer and/or more niche companies. This leaves more room to grow, but also more space to collapse operationally.

Developed markets, on the other hand, may not experience the price spikes that emerging companies do, but they are more stable and consistent, with a stronger foundation to fall back on. And when we look at the one-year price difference between the two mentioned ETFs, the emerging markets ETF has a better return. Over the five-year span, however, IEFA’s return is three times higher than IEMG’s and has moved more gradually.

Just be mindful that when investing in international stocks and ETFs, prices can move differently from those of U.S.-centered assets, so investors may want to familiarize themselves with the news and/or patterns in the countries where the targeted assets are focused.

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Adé Hennis has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

IEFA vs. IEMG: Comparing the Emerging and Developed Markets was originally published by The Motley Fool