X-Ray: Vanguard Emerging Markets

(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.