Hi Folks,
I would appreciate opinions on Vanguard Emerging Markets Stock Index Fund Admiral Shares (VEMAX) versus Vanguard MSCI Emerging Markets ETF (VWO). The expense ratio for both is 0.22%; however VEMAX charges a 0.5% purchase fee and a 0.25% redemption fee (per Vanguard's web site), while I believe VWO can be bought and sold without charge through a Vanguard account. What I have read also leads me to believe the ETF will be more tax-efficient. This all leads me to conclude that VWO is the clear superior choice; am I missing something important?
Thanks,
Walt
Comments
Only thing I'd add is that before you buy Vanguard, you might check out some of the "fundamental" EM etf's like Ediv and Dem.
- Vanguard's ETF share class of a fund cannot be more tax efficient than the open end share classes (Admiral, Investor), and will usually be less tax efficient. This is because, unlike other ETFs, Vanguard's ETFs are simply another share class of the same fund (not a clone). Thus, there is just a single underlying portfolio - when it distributes dividends, it distributes them to all the share classes.
The reason why the ETF share class is typically less tax efficient is that its expense is usually lower than the other share classes, meaning that less of the gross dividend is eaten up by the expenses, meaning that the net dividend distributed is higher, and a higher payout means higher taxes and a lower tax efficiency. In this situation, that's a good thing - one does not want to avoid taxes by making less money.
- Vanguard puts a restriction on how frequently you can buy/sell ETFs in VBS (Vanguard Brokerage Services) accounts. Specifically, "if you buy and sell the same Vanguard ETF in a Vanguard Brokerage account more than 25 times in a 12-month period, you may be restricted from purchasing that Vanguard ETF through your Vanguard Brokerage account for 60 days." Other brokerages don't limit you.
- VWO often has a huge bid/ask spread. According to M*, the spread is currently 1.89%. That means that you'll pay about 0.95% above the midpoint to buy, and about 0.95% below the midpoint to sell. Assuming the ETF is tracking perfectly (so that the midpoint is the NAV), it's like paying a 0.95% purchase fee and a 0.95% sell fee, which sure looks worse than the 0.50%/0.25% you quoted for VEMAX.
Of course, the spread varies from moment to moment, and you could come out better.
As has been pointed out a number of times in the financial press, cap weighting can over-represent overvalued stocks and under-represent undervalued stocks, and the numbers have generally favored rule-based funds that use other metrics. Dem, for instance, has an edge over Vwo for all time periods - it's a 5* fund with High/Low Return/Risk versus Vwo's 4* Average/Average.
I'd pick Vwo/Veiex over most of the actively managed OE EM funds out there, but Dem beats it pretty handily. Ediv is newer, and I haven't studied it closely, but seems to weight mid and small caps more than Dem. (W'Tree has a separate small-cap EM ETF.)
--- True, but each investor has to then take a look at how frequently they trade and what type of investor they are. First, note that Vanguard offers the first 25 trades of their own ETFs without commissions.
Also, the restriction you noted only refers to buy/sell transactions. You have the freedom to make say 100 buy transactions in a given year if you wanted to.
I also like DEM and DGS too:
http://www.wisdomtree.com/library/pdf/whitepapers/WisdomTree-Emerging-Markets-Risk-679.pdf
The 3-10 year backtests of EDIV (SPDRS S&P EM Dividend ETF) looks good too but is very thinly traded. More about the S&P index that EDIV tracks....
"The S&P Emerging Markets Dividend Opportunities Index generally includes 100 tradable, exchange-listed common stocks from emerging market countries that offer high dividend yields. To be included in the Index, stocks must have a total market capitalization greater than $300 million and a three-month average daily value traded greater than $1 million. Additionally, stocks must have positive 3-year earnings growth and profitability. Stocks are weighted by annual dividend yield. To ensure diverse exposure, no single country or sector has more than a 25% weight and no single stock has more than a 3% weight."
Another intriguing new EM ETF is the AlphaDex one by First Trust:
http://www.ftportfolios.com/retail/etf/ETFsummary.aspx?Ticker=FEM
But again, this AlphaDEX EM ETF is extremely thinly traded. But nonetheless, their AlphaDex series of ETFs that have been in place for 3+ years have performed pretty decent.
I think one of the things that's *additionally* helpful with some of these alternative weighted EM ETFs (including DEM, DGS and the ETF based on the Fundamental RAFI EM - PXH, AlphaDEX EM, ETC) is that they have their own unique re-balancing strategy of some sorts. This can help in a buy low, sell high fashion.