Vanguard ETFs: VWO versus EEM

I found a couple of interesting nuggets in the news about Vanguard ETFs that I thought would be worth exploring, writes  Roger Nusbaum. The first was an article (might require a subscription) on the Morningstar site that evaluated the Vanguard Emerging Market Viper (VWO).

The way I read these articles it seems like they are aimed at trying to help you decide whether or not a particular ETF is a good trade or not. This is the wrong way to look at for most people. A diversified portfolio means always including some amount of emerging markets. The amount depends on tolerance for volatility and normal asset class analysis.

Most of my clients have about 5% allocated to emerging markets. Sometimes, based on current events and what I think might happen over the next six months or a year I may increase or reduce that exposure. Maybe I read these articles incorrectly but I would like to read why now is a time for more or less exposure not that a particular segment of the market may be to pricey. If some area of the market is too pricey is Morningstar suggesting no exposure? That is not clear to me.

Another thing in the article that I thought was strange was the author's implication the VWO is a better choice, if you have to have emerging market exposure, than EEM because the expense ratio is a lot less. For the record VWO's expense ratio is 0.30% (according to the article) and EEM's expense ratio is 0.76% (according to Yahoo Finance). I think of this as forest for the trees analysis. At this point I will note that VWO has an OEF equivalent (VEIEX). Since VWO's inception in March it has lagged EEM by at least 200 basis points (I am eyeballing the chart). For one year EEM looks to have outperformed the OEF equivalent by about 300 basis points. And for two years EEM seems to be ahead by about 1000 basis points. Even if the numbers are off, EEM has clearly outperformed by more than the expense ratio at every normal time interval since its inception.

There was no mention about this at all in the article. I emailed the author about this but I am quite certain I will get no response. If he does reply I will let you know.

The other item was this article about the inclusion of Vanguard ETFs in the model ETF portfolios at several of the big brokerage firms. The way these usually work is that the salesman will put you into any one of three to six cookie cutter portfolios. Often, but not always, there is a lot of duplication and then not much in the way of analysis going forward to implement changes, but at least these products are expensive.

That these woefully flawed products continue to exist and be popular is testament to the fact that people are willing to pay for shortcuts and like being able to blame someone else when something does not work out. Often the fees for this type of thing are 2%. The S+P 500 is up 2.4% so far this year. Lets say, hypothetically it finishes the year up 4.8%. Do you think it would easy to overcome a 200 basis point fee with "the right mix" of index funds? It certainly is possible but this is not the path of the least resistance.

To repeat an oft stated theme of this site, there are many tools out there, make use of more than one.