If you’re looking to invest in international equities, you may have come across two popular exchange-traded funds (ETFs): EFA vs EEM.
While both funds offer exposure to non-U.S. markets, there are some key differences to consider before making a decision.
EFA, or the iShares MSCI EAFE ETF, tracks an index of large- and mid-cap stocks from developed markets in Europe, Asia, and Australia. EEM, or the iShares MSCI Emerging Markets ETF, tracks an index of large- and mid-cap stocks from emerging markets in Asia, Latin America, and Africa. Understanding the differences in their underlying holdings, performance, and investment strategies is crucial to making an informed decision.
When it comes to performance, EFA has provided higher returns than EEM over the past ten years, according to a report by Money Main St. However, EEM has been outperforming EFA in recent years, with a year-to-date return of 1.95% compared to EFA’s -0.13%, as reported by ETF.com. Additionally, EEM has a higher expense ratio than EFA, which may impact long-term returns. It’s important to consider these factors, as well as your own investment goals and risk tolerance, before choosing between the two funds.
Key Takeaways EFA vs EEM
- EFA and EEM are two popular ETFs that offer exposure to non-U.S. markets.
- EFA tracks an index of developed market stocks, while EEM tracks an index of emerging market stocks.
- EFA has provided higher returns than EEM over the past ten years, but EEM has been outperforming EFA in recent years. The expense ratio of EEM is also higher than EFA’s.
Understanding EFA vs EEM
If you’re looking to invest in international stocks, you may have come across the iShares MSCI EAFE ETF (EFA) and the iShares MSCI Emerging Markets ETF (EEM). Both ETFs are popular choices for investors looking to diversify their portfolio with international exposure. Here’s what you need to know about the differences between EFA and EEM.
Fundamental Differences
The main difference between EFA and EEM is the type of markets they invest in. EFA invests in developed markets, while EEM invests in emerging markets. This means that EFA is more focused on established economies such as Europe, Australia, and Japan, while EEM is more focused on developing economies such as China, India, and Brazil.
Another difference between the two ETFs is their performance. Over the past ten years, EFA has provided 3.32% higher returns than EEM. However, this doesn’t necessarily mean that EFA is a better investment than EEM. The performance of each ETF will depend on various factors such as market conditions, economic growth, and political stability.
Key Constituents and Sectors
EFA and EEM also differ in their key constituents and sectors. EFA’s biggest holding is Nestle SA, a Swiss food and beverage company, while EEM’s biggest holding is Taiwan Semiconductor Manufacturing Co Ltd, a Taiwanese semiconductor company. EFA encompasses sectors from developed markets such as healthcare, consumer discretionary, and industrials. On the other hand, EEM encompasses sectors from emerging markets such as financials, energy, and materials.
It’s important to note that investing in international stocks carries additional risks such as currency fluctuations and political instability. Therefore, it’s important to do your research and consult with a financial advisor before making any investment decisions.
Overall, both EFA and EEM offer exposure to international markets, but they differ in their investment focus and performance. Depending on your investment goals and risk tolerance, one ETF may be a better fit for your portfolio than the other.
Performance Analysis
Historical Returns
When it comes to historical returns, EFA has outperformed EEM over the past ten years with a 3.32% higher return as per Money Main St. However, past performance is not a guarantee of future results. It is essential to note that both EFA and EEM have experienced volatility in their returns over the years.
Volatility and Risk Assessment
In terms of volatility, EEM has a higher beta than EFA, making it a more volatile investment option. As per ETF Insider, EEM has a beta of 1.07, while EFA has a beta of 0.91. It is essential to note that beta is a measure of the risk of an asset compared to the market as a whole. A beta of 1 indicates that an asset’s price will move with the market, while a beta greater than 1 indicates that the asset is more volatile than the market, and a beta less than 1 indicates that the asset is less volatile than the market.
When it comes to risk profiles, EEM is riskier than EFA due to its exposure to emerging markets. Emerging markets are known for their political and economic instability, which can result in higher volatility and risk. On the other hand, EFA invests in developed markets, which are generally considered to be more stable and less risky.
In conclusion, both EFA and EEM have their advantages and disadvantages, and the choice between the two depends on your investment goals and risk tolerance. It is crucial to evaluate the historical performance, volatility, and risk profiles of both funds before making an investment decision.
Investment Strategies
When it comes to investing, choosing the right strategy is crucial. In this section, we will discuss the investment strategies of EFA and EEM.
Asset Allocation
EFA and EEM have different asset allocation strategies. EFA is focused on developed markets, while EEM is focused on emerging markets. EFA invests in large and mid-cap companies in Europe, Australasia, and the Far East. EEM invests in emerging markets such as Brazil, Russia, India, and China.
Diversification Benefits
One of the benefits of investing in both EFA and EEM is diversification. By investing in both developed and emerging markets, you can spread your risk across different asset classes. This can help to reduce your overall portfolio risk.
Investing in EFA and EEM can also provide diversification benefits in terms of correlations. Developed and emerging markets tend to have low correlations with each other. This means that when one market is performing poorly, the other may be performing well. By investing in both, you can potentially reduce your overall portfolio volatility.
When choosing between EFA and EEM, it’s important to consider your investment goals and risk tolerance. EEM tends to be more volatile than EFA due to the nature of emerging markets. If you have a higher risk tolerance and are looking for higher potential returns, EEM may be a better option for you. If you have a lower risk tolerance and are looking for more stable returns, EFA may be a better option.
In summary, both EFA and EEM have their own investment strategies and benefits. By understanding these strategies and considering your own investment goals and risk tolerance, you can make an informed decision about which one is right for you.
Economic and Regional Exposure
When it comes to investing in international equities, it’s important to consider the economic and regional exposure of the ETFs you’re considering. In the case of EFA and EEM, these ETFs offer exposure to different regions and economies, which may impact their performance.
Emerging Economies Focus
EEM is an ETF that seeks to provide investors with exposure to the performance of emerging market stocks. It tracks an index of equities from countries like China, South Korea, and Taiwan. As such, EEM has a higher exposure to emerging economies than EFA.
China is the largest country in EEM, accounting for over 40% of the fund’s total assets. South Korea and Taiwan are the next largest countries in the fund, making up around 16% and 12% of the fund’s assets, respectively. These countries are known for their rapid economic growth and potential for high returns, but also carry a higher level of risk.
Developed Markets Insights
EFA, on the other hand, aims to replicate the performance of developed market equities in regions such as Europe, Japan, and the Far East. The fund has a higher exposure to developed economies than EEM.
Japan is the largest country in EFA, accounting for over 20% of the fund’s total assets. The United Kingdom, France, and Switzerland are the next largest countries in the fund, making up around 10%, 9%, and 8% of the fund’s assets, respectively. These countries are known for their stable economies and lower risk, but also have lower potential for high returns.
Overall, EEM and EFA offer exposure to different regions and economies, which may impact their performance. If you’re looking for exposure to emerging economies, EEM may be a better fit for your portfolio. If you’re looking for exposure to developed economies, EFA may be a better fit.
Fund Management and Operation
When comparing EFA vs EEM, it is essential to look at the fund management and operation. This section will discuss the expense ratios and fees as well as the assets under management for both funds.
Expense Ratios and Fees
Expense ratios and fees are a critical factor to consider when investing in ETFs. The expense ratio is the annual fee charged by the fund to cover its operating expenses. EFA has an expense ratio of 0.33%, while EEM has an expense ratio of 0.69%. This means that EFA is cheaper to invest in than EEM.
In addition to the expense ratio, it is essential to consider other fees associated with the ETF. These fees can include trading fees, brokerage fees, and other expenses. It is important to understand these fees before investing in either fund.
Assets Under Management
Assets under management (AUM) is another important factor to consider when comparing EFA vs EEM. AUM refers to the total value of assets that the fund manages. EEM has a higher AUM than EFA, with $47.5 billion compared to EFA’s $42.6 billion.
The AUM of a fund can impact its liquidity and trading volume. A fund with a higher AUM may have more liquidity and be easier to trade. However, a fund with a lower AUM may be more nimble and able to take advantage of opportunities in the market.
In conclusion, when comparing EFA vs EEM, it is important to consider the expense ratios and fees as well as the assets under management. EFA has a lower expense ratio, while EEM has a higher AUM. Understanding these factors can help you make an informed decision when investing in these funds.
