X-Ray: Vanguard Emerging Markets

By Penelope Wang, senior writer


(MONEY Magazine) -- Vanguard Emerging Markets Stock is the undisputed giant among funds that invest in developing economies like China.

Thanks to its terrific returns (16% annual gains for 10 years), the fund has swelled to nearly $60 billion.

But the fact that this niche fund is now Vanguard's largest foreign offering -- bigger than even Total International Stock -- could be a sign that emerging-markets mania is nearing a top.

Before you jump onboard, know how the fund works and the risks involved.

At most firms, mutual funds and ETFs are run as separate entities. At Vanguard, they're operated as different share classes of the same fund.

This gives Emerging Markets -- which is in the MONEY 70, our recommended list of funds and ETFs -- a huge advantage when it comes to attracting assets.

In fact, $44 billion of the fund's total assets have come from its ETF version (tickers: VWO for the ETF, VEIEX for the fund). And of that, $19 billion rushed in last year.

Shareholders benefit from these economies of scale, says Vanguard chief investment officer Gus Sauter.

Case in point: VEIEX's expense ratio has sunk to 0.35%, vs. 1.87% for its peers. VWO charges 0.22%, compared with 0.68% for other ETFs in this category.

This passively managed fund, which tracks the MSCI Emerging Markets index, holds nearly 900 stocks in 21 different countries. But this is a capitalization-weighted index, which means that despite its broad global reach, the largest economies have the most influence. Nearly 60% of the fund is invested in four places: China, Brazil, South Korea, and Taiwan.

By comparison, these countries represent just 43% of the average emerging-markets fund and 22% of American Funds New World, another MONEY 70 fund that invests in this region (though New World also invests in the developed world).

And you won't find stocks from some smaller nations such as Vietnam in the fund because they're too illiquid.

If you're looking for emerging-markets exposure through an index fund, this one is hard to beat.

But if you're seeking a fund to boost your overall diversification, think twice: You may already have a 20% stake or so in the same type of stocks this fund owns if you hold a broad foreign fund.

What if you're just looking to boost gains? "This fund is dominated not by scrappy fast-growing startups but well-known multinational companies," says Dave Nadig of Index-Universe, which tracks funds and ETFs.

And blue chips based in giant markets like China may not give you the biggest pop going forward. Then again, China is still growing in fits and starts, so you'll still feel the sting of severe short-term pullbacks.  To top of page

Frontline troops push for solar energy
The U.S. Marines are testing renewable energy technologies like solar to reduce costs and casualties associated with fossil fuels. Play
25 Best Places to find rich singles
Looking for Mr. or Ms. Moneybags? Hunt down the perfect mate in these wealthy cities, which are brimming with unattached professionals. More
Fun festivals: Twins to mustard to pirates!
You'll see double in Twinsburg, Ohio, and Ketchup lovers should beware in Middleton, WI. Here's some of the best and strangest town festivals. Play
Overnight Avg Rate Latest Change Last Week
30 yr fixed3.94%3.93%
15 yr fixed3.03%3.03%
5/1 ARM3.33%3.27%
30 yr refi4.02%3.99%
15 yr refi3.09%3.07%
Rate data provided
by Bankrate.com
View rates in your area
 
Find personalized rates:
Index Last Change % Change
Dow 16,461.32 -153.49 -0.92%
Nasdaq 4,382.85 -36.63 -0.83%
S&P 500 1,927.11 -14.17 -0.73%
Treasuries 2.23 0.02 0.95%
Data as of 6:38pm ET
Company Price Change % Change
Bank of America Corp... 16.40 -0.20 -1.20%
Yahoo! Inc 42.00 1.82 4.53%
Apple Inc 102.99 0.52 0.51%
Facebook Inc 78.37 -0.32 -0.41%
Boston Scientific Co... 12.32 0.29 2.41%
Data as of 4:04pm ET

Sections

Domino's pizza used to suck. Now people like it and the stock is at a record high More

The midterm elections are around the corner, and the economy remains a top concern. With unemployment down and inflation low, why do people still feel the economy stinks? More

Uber canceled its free rides with hot girls promotion in Lyon, France before it ever launched. More

Startups focusing on "ag tech," or agricultural technology, are gaining the attention of farmers and investors More

Consistently checking whether you're savings is projected to last you through retirement is one of the best ways to create a smart and responsible retirement income plan and manage it along the way. More

Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.