LQD vs. EEM: What’s The Difference?

The iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) and the iShares MSCI Emerging Markets ETF (EEM) are both among the Top 100 ETFs. LQD is a iShares Corporate Bond fund and EEM is a iShares Diversified Emerging Mkts fund. So, what’s the difference between LQD and EEM? And which fund is better?

The expense ratio of LQD is 0.54 percentage points lower than EEM’s (0.14% vs. 0.68%). LQD is mostly comprised of BBB bonds while EEM has a high exposure to the technology sector. Overall, LQD has provided higher returns than EEM over the past ten years.

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

Summary

LQD EEM
Name iShares iBoxx $ Investment Grade Corporate Bond ETF iShares MSCI Emerging Markets ETF
Category Corporate Bond Diversified Emerging Mkts
Issuer iShares iShares
AUM 40.23B 30.33B
Avg. Return 6.58% 5.47%
Div. Yield 2.48% 1.48%
Expense Ratio 0.14% 0.68%

The iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) is a Corporate Bond fund that is issued by iShares. It currently has 40.23B total assets under management and has yielded an average annual return of 6.58% over the past 10 years. The fund has a dividend yield of 2.48% with an expense ratio of 0.14%.

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%.

LQD’s dividend yield is 1.00% higher than that of EEM (2.48% vs. 1.48%). Also, LQD yielded on average 1.11% more per year over the past decade (6.58% vs. 5.47%). The expense ratio of LQD is 0.54 percentage points lower than EEM’s (0.14% vs. 0.68%).

Fund Composition

Holdings

LQD - Holdings

LQD Bond Sectors Weight
BBB 50.92%
A 37.97%
AA 8.49%
AAA 2.7%
BB 0.05%
Below B 0.0%
B 0.0%
US Government 0.0%
Others -0.13%

LQD’s Top Bond Sectors are ratings of BBB, A, AA, AAA, and BB at 50.92%, 37.97%, 8.49%, 2.7%, and 0.05%. The fund is less weighted towards Below B (0.0%), B (0.0%), and US Government (0.0%) rated bonds.

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%.

Risk Analysis

LQD EEM
Mean Return 0.47 0.38
R-squared 66.93 83.5
Std. Deviation 5.94 17.79
Alpha 0.52 -2.33
Beta 1.62 1.08
Sharpe Ratio 0.85 0.22
Treynor Ratio 3.08 2.22

The iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) has a Alpha of 0.52 with a Sharpe Ratio of 0.85 and a Standard Deviation of 5.94. Its Treynor Ratio is 3.08 while LQD’s Mean Return is 0.47. Furthermore, the fund has a Beta of 1.62 and a R-squared of 66.93.

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

LQD’s Mean Return is 0.09 points higher than that of EEM and its R-squared is 16.57 points lower. With a Standard Deviation of 5.94, LQD is slightly less volatile than EEM. The Alpha and Beta of LQD are 2.85 points higher and 0.54 points higher than EEM’s Alpha and Beta.

Performance

Annual Returns

LQD vs. EEM - Annual Returns

Year LQD EEM
2020 11.14% 17.56%
2019 17.13% 17.67%
2018 -3.76% -14.98%
2017 7.16% 36.42%
2016 5.97% 10.51%
2015 -1.08% -15.41%
2014 8.57% -2.82%
2013 -2.49% -3.14%
2012 11.68% 17.32%
2011 8.89% -18.87%
2010 9.15% 15.93%

LQD had its best year in 2019 with an annual return of 17.13%. LQD’s worst year over the past decade yielded -3.76% and occurred in 2018. In most years the iShares iBoxx $ Investment Grade Corporate Bond ETF provided moderate returns such as in 2017, 2014, and 2011 where annual returns amounted to 7.16%, 8.57%, and 8.89% 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

LQD vs. EEM - Portfolio Growth

Fund Initial Balance Final Balance CAGR
LQD $10,000 $19,776 6.58%
EEM $10,000 $15,578 5.47%

A $10,000 investment in LQD would have resulted in a final balance of $19,776. This is a profit of $9,776 over 11 years and amounts to a compound annual growth rate (CAGR) of 6.58%.

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%.

LQD’s CAGR is 1.11 percentage points higher than that of EEM and as a result, would have yielded $4,198 more on a $10,000 investment. Thus, LQD outperformed EEM by 1.11% annually.


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