EFA vs. EEM: What’s The Difference?

The iShares MSCI EAFE ETF (EFA) and the iShares MSCI Emerging Markets ETF (EEM) are both among the Top 100 ETFs. EFA is a iShares Foreign Large Blend fund and EEM is a iShares Diversified Emerging Mkts fund. So, what’s the difference between EFA and EEM? And which fund is better?

The expense ratio of EFA is 0.36 percentage points lower than EEM’s (0.32% vs. 0.68%). EFA also has a lower exposure to the financial services sector and a lower standard deviation. Overall, EFA has provided higher returns than EEM over the past ten years.

In this article, we’ll compare EFA vs. EEM. We’ll look at holdings and annual returns, as well as at their performance and fund composition. Moreover, I’ll also discuss EFA’s and EEM’s industry exposure, portfolio growth, and risk metrics and examine how these affect their overall returns.

Summary

EFA EEM
Name iShares MSCI EAFE ETF iShares MSCI Emerging Markets ETF
Category Foreign Large Blend Diversified Emerging Mkts
Issuer iShares iShares
AUM 56.77B 30.33B
Avg. Return 6.47% 5.47%
Div. Yield 2.28% 1.48%
Expense Ratio 0.32% 0.68%

The iShares MSCI EAFE ETF (EFA) is a Foreign Large Blend fund that is issued by iShares. It currently has 56.77B total assets under management and has yielded an average annual return of 6.47% over the past 10 years. The fund has a dividend yield of 2.28% with an expense ratio of 0.32%.

The iShares MSCI Emerging Markets ETF (EEM) is a Diversified Emerging Mkts fund that is issued by iShares. It currently has 30.33B total assets under management and has yielded an average annual return of 5.47% over the past 10 years. The fund has a dividend yield of 1.48% with an expense ratio of 0.68%.

EFA’s dividend yield is 0.80% higher than that of EEM (2.28% vs. 1.48%). Also, EFA yielded on average 1.00% more per year over the past decade (6.47% vs. 5.47%). The expense ratio of EFA is 0.36 percentage points lower than EEM’s (0.32% vs. 0.68%).

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Fund Composition

Industry Exposure

EFA vs. EEM - Industry Exposure

EFA EEM
Technology 9.68% 21.36%
Industrials 15.01% 4.61%
Energy 3.51% 5.17%
Communication Services 5.68% 11.76%
Utilities 3.35% 1.99%
Healthcare 12.8% 5.06%
Consumer Defensive 10.56% 5.45%
Real Estate 3.01% 1.98%
Financial Services 16.88% 18.39%
Consumer Cyclical 11.62% 15.16%
Basic Materials 7.91% 9.07%

The iShares MSCI EAFE ETF (EFA) has the most exposure to the Financial Services sector at 16.88%. This is followed by Industrials and Healthcare at 15.01% and 12.8% respectively. Utilities (3.35%), Energy (3.51%), and Communication Services (5.68%) only make up 12.54% of the fund’s total assets.

EFA’s mid-section with moderate exposure is comprised of Basic Materials, Technology, Consumer Defensive, Consumer Cyclical, and Healthcare stocks at 7.91%, 9.68%, 10.56%, 11.62%, and 12.8%.

The iShares MSCI Emerging Markets ETF (EEM) has the most exposure to the Technology sector at 21.36%. This is followed by Financial Services and Consumer Cyclical at 18.39% and 15.16% respectively. Utilities (1.99%), Industrials (4.61%), and Healthcare (5.06%) only make up 11.66% of the fund’s total assets.

EEM’s mid-section with moderate exposure is comprised of Energy, Consumer Defensive, Basic Materials, Communication Services, and Consumer Cyclical stocks at 5.17%, 5.45%, 9.07%, 11.76%, and 15.16%.

EFA is 1.51% less exposed to the Financial Services sector than EEM (16.88% vs 18.39%). EFA’s exposure to Industrials and Healthcare stocks is 10.40% higher and 7.74% higher respectively (15.01% vs. 4.61% and 12.8% vs. 5.06%). In total, Utilities, Energy, and Communication Services also make up 6.38% less of the fund’s holdings compared to EEM (12.54% vs. 18.92%).

Holdings

EFA - Holdings

EFA Holdings Weight
Nestle SA 2.11%
ASML Holding NV 1.69%
Roche Holding AG 1.55%
LVMH Moet Hennessy Louis Vuitton SE 1.28%
Novartis AG 1.19%
Toyota Motor Corp 1.09%
AstraZeneca PLC 0.92%
Unilever PLC 0.9%
AIA Group Ltd 0.88%
SAP SE 0.86%

EFA’s Top Holdings are Nestle SA, ASML Holding NV, Roche Holding AG, LVMH Moet Hennessy Louis Vuitton SE, and Novartis AG at 2.11%, 1.69%, 1.55%, 1.28%, and 1.19%.

Toyota Motor Corp (1.09%), AstraZeneca PLC (0.92%), and Unilever PLC (0.9%) have a slightly smaller but still significant weight. AIA Group Ltd and SAP SE are also represented in the EFA’s holdings at 0.88% and 0.86%.

EEM - Holdings

EEM Holdings Weight
Taiwan Semiconductor Manufacturing Co Ltd 6.36%
Alibaba Group Holding Ltd Ordinary Shares 4.58%
Tencent Holdings Ltd 4.41%
Samsung Electronics Co Ltd 4.05%
Meituan 1.24%
Vale SA 1.04%
Naspers Ltd Class N 1.04%
Reliance Industries Ltd Shs Dematerialised 0.97%
Infosys Ltd 0.92%
China Construction Bank Corp Class H 0.83%

EEM’s Top Holdings are Taiwan Semiconductor Manufacturing Co Ltd, Alibaba Group Holding Ltd Ordinary Shares, Tencent Holdings Ltd, Samsung Electronics Co Ltd, and Meituan at 6.36%, 4.58%, 4.41%, 4.05%, and 1.24%.

Vale SA (1.04%), Naspers Ltd Class N (1.04%), and Reliance Industries Ltd Shs Dematerialised (0.97%) have a slightly smaller but still significant weight. Infosys Ltd and China Construction Bank Corp Class H are also represented in the EEM’s holdings at 0.92% and 0.83%.

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Risk Analysis

EFA EEM
Mean Return 0.57 0.38
R-squared 96.78 83.5
Std. Deviation 15.01 17.79
Alpha 0.47 -2.33
Beta 0.98 1.08
Sharpe Ratio 0.41 0.22
Treynor Ratio 5.33 2.22

The iShares MSCI EAFE ETF (EFA) has a Mean Return of 0.57 with a Beta of 0.98 and a Standard Deviation of 15.01. Its Alpha is 0.47 while EFA’s Treynor Ratio is 5.33. Furthermore, the fund has a Sharpe Ratio of 0.41 and a R-squared of 96.78.

The iShares MSCI Emerging Markets ETF (EEM) has a Mean Return of 0.38 with a Beta of 1.08 and a R-squared of 83.5. Its Standard Deviation is 17.79 while EEM’s Alpha is -2.33. Furthermore, the fund has a Sharpe Ratio of 0.22 and a Treynor Ratio of 2.22.

EFA’s Mean Return is 0.19 points higher than that of EEM and its R-squared is 13.28 points higher. With a Standard Deviation of 15.01, EFA is slightly less volatile than EEM. The Alpha and Beta of EFA are 2.80 points higher and 0.10 points lower than EEM’s Alpha and Beta.

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Performance

Annual Returns

EFA vs. EEM - Annual Returns

Year EFA EEM
2020 7.92% 17.56%
2019 21.94% 17.67%
2018 -13.83% -14.98%
2017 24.94% 36.42%
2016 0.96% 10.51%
2015 -0.9% -15.41%
2014 -5.04% -2.82%
2013 22.62% -3.14%
2012 17.22% 17.32%
2011 -12.18% -18.87%
2010 7.52% 15.93%

EFA had its best year in 2017 with an annual return of 24.94%. EFA’s worst year over the past decade yielded -13.83% and occurred in 2018. In most years the iShares MSCI EAFE ETF provided moderate returns such as in 2016, 2010, and 2020 where annual returns amounted to 0.96%, 7.52%, and 7.92% respectively.

The year 2017 was the strongest year for EEM, returning 36.42% on an annual basis. The poorest year for EEM in the last ten years was 2011, with a yield of -18.87%. Most years the iShares MSCI Emerging Markets ETF has given investors modest returns, such as in 2014, 2016, and 2010, when gains were -2.82%, 10.51%, and 15.93% respectively.

Portfolio Growth

EFA vs. EEM - Portfolio Growth

Fund Initial Balance Final Balance CAGR
EFA $10,000 $18,269 6.47%
EEM $10,000 $15,578 5.47%

A $10,000 investment in EFA would have resulted in a final balance of $18,269. This is a profit of $8,269 over 11 years and amounts to a compound annual growth rate (CAGR) of 6.47%.

With a $10,000 investment in EEM, the end total would have been $15,578. This equates to a $5,578 profit over 11 years and a compound annual growth rate (CAGR) of 5.47%.

EFA’s CAGR is 1.00 percentage points higher than that of EEM and as a result, would have yielded $2,691 more on a $10,000 investment. Thus, EFA outperformed EEM by 1.00% annually.


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