Emerging Markets VWO vs DEM

The research staff here at Wiser Wealth recently analyzed all the broad based ETFs that track emerging market indices. The staple in Emerging Markets is currently Vanguards VWO and iShares’ EEM. The comparison articles on these funds are endless. One fund that filtered to the top of the Emerging Market ETF list that might be less known is Wisdom Tree’s DEM. We compared it in this article to Vanguards VWO. The following report helps compare the DEM and VWO Emerging Market strategies as well as the results of the last few years.

Many firms develop ETFs to track only one world region, or sometimes only one country.  However, the ETFs that expose themselves to a number of regions are more diversified in their holdings and are typically less risky investments.

There are two ETFs of particular interest due to their contrasting natures:  Vanguard’s MSCI Emerging Markets ETF – ticker VWO) and Wisdom Tree’s Emerging Markets Equity Income Fund – ticker DEM).  VWO has been widely used in part due to the size of the fund, holding $48.67 billion in assets. It also has a trading volume of 13,117,869 and a 30-day average bid-ask spread of $0.01. All of these things combined would give VWO a good tradability grade. In contrast, DEM is a much smaller fund with only $1.59 billion assets under management, 300,901 in trading volume, and a $0.50 bid-ask spread. Both ETFs are trading at a premium. Recently, VWO is trading at a 0.676% premium while DEM is higher at a 1.557% premium.

Past Performance

The apparent bias for VWO over DEM cannot be explained by a superior performance.  According to Morningstar reports released 5/31/2011, DEM performed better than VWO.  Since VWO’s inception in May 2005, it has spent every year in the bottom two performance quartiles for its category. Although DEM can only fall back on three full years of historical data since its inception in July 2007, it has shown a more impressive finish. It made a top-quartile placement in 2008, suffering a dip to the second-lowest quartile in 2009, and recovering to the second-highest quartile in 2010. The graph below depicts the actual performance of the two funds against each other.

Country and Stock Diversification

As already mentioned, the greater diversity, hypothetically, means less risk. DEM, the arguably smaller of the two, has 628 total stocks in its holdings, while VWO holds 854 total stocks. The following tables show a percentage breakdown by country and by sector of each ETFs stocks.

VWO is heavily weighted in Asian countries, both emerging and developed, and has a little less than one-quarter of its holdings in Latin America.  DEM has given one-quarter of its holdings to Latin American, another quarter to Asia developed, and around one-fifth each to Europe and Asia emerging.  If a current portfolio already favors one of these regions, it may be of benefit to add the fund that will result in a more diversified regional balance.  Some reports speculate that Latin America emerging markets, particularly Brazil, may have increasing influence on the world’s GDP in the next 5-10 years.

Market Capitalization

Another area to consider when trying to balance and diversify a portfolio is market capitalization, or size of holdings. Both VWO and DEM have the majority of their holdings in large cap companies.  However, VWO has allocated 84.45% of its stocks in giant and large cap companies, while DEM only has 69.89% in giant and large caps.  VWO has little mid and small cap exposure, making it susceptible to downturns in large cap company market prices.  DEM has allotted 21.25% of its stocks to be held in mid cap companies, and 8.85% in small caps.  Smaller cap firms have the potential for rapid growth, but with added risk.  Mid cap companies offer greater stability than small caps due to size, and higher growth potential that large caps.  We also find that large cap emerging market companies are more closely aligned with global economies where mid and small cap companies selling locally are somewhat shielded from global issues. DEM offers better protection than VWO in providing more balanced exposure among all market asset classes.


Risk and reward can be measured by standard deviation and Sharpe ratio.  The higher the standard deviation, the higher the risk.  Based on a three-year period ending May 31, 2011, the standard deviation for VWO is 32.59, while DEM stands at 26.52.

The Sharpe ratio helps determine if there is enough reward to make the risk worthwhile.  The higher the Sharpe ratio, the more worthwhile the risk.  As of May 31, 2011, VWO had a three-year Sharpe ratio of 0.18, while DEM had 0.42.  Based on these numbers, DEM offers a higher reward potential for the risk taken.

Indexes and Style

VWO and DEM track different indexes, in different ways.  VWO tracks the MSCI Emerging Markets Index, which examines economic development, size, liquidity and market accessibility, and then weights its holdings based on their market capitalization.  DEM has created a unique mix of companies by following the WisdomTree Emerging Markets Equity Index, which is actually assembled based on the highest 30% of dividend-yielding stocks from another index, the WisdomTree Emerging Markets Dividend Index.  DEM offers some protection from the regular volatility associated with the emerging markets through dividends.  As of August 1, 2011, DEM reports a distribution yield of 6.18% (calculated based on the last divided multiplied times four), which is much higher compared to VWO with a 1.680 distribution yield (calculated based on the last four dividend payments).

Summary and Conclusions

In summary, VWO has a longer history and larger assets under management compared to DEM (roughly a 50/.1.5 ratio).  It has a higher trading volume and lower bid-ask spread.  VWO has a relatively higher number of holdings.  However, VWO performance has trailed that of DEM.

VWO is heavily concentrated in Asia, both emerging and developed, while DEM is more evenly spread among four emerging market regions.  VWO also has a significantly high concentration in giant and large cap companies, with miniscule amounts in mid and small caps.  DEM includes twice as much concentration in mid and small caps, as compared to VWO.

VWO has higher standard deviation than DEM, with lower Sharpe ratio, indicating DEM offers a potentially higher reward for the risk undertaken.  DEM also includes a much higher dividend.

For investors looking for liquidity or to add more Asian investments to their portfolio, VWO would be a good choice.  For investors looking for greater diversity in region, market cap and style concentrations, DEM would be the better choice.  From a pure analytical perspective, DEM offers potentially better return on the investment.

Elizabeth Jones, Intern Research Analyst and Sonja Gonzalez, Financial Advisor contributed to this article.


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