Vanguard Emerging Markets Stock Index Fund Review (VEIEX, VEMAX, VWO)

The Vanguard Emerging Markets Stock Index Fund offers investors a low-cost way to invest directly in emerging markets around the world, such as Brazil, Russia, India, Taiwan, and China. The fund offers diversified exposure to the emerging markets by closely tracking the FTSE Emerging Transition Index and has beaten its peer average 8 out of the last 10 years.

Composition

The Vanguard Emerging Markets Stock Index Fund holds about 1047 stocks. The median market cap of the companies involved in this fund is $18 billion. Price/earnings ratio of this fund is 13.5. Over 92% of the companies found in this fund are based in emerging markets, and remaining 7.7% of the companies are in the pacific rim region. The 10 largest holdings of this fund comprise 16% of the portfolio.

Performance

Stocks of companies in emerging markets generally tend to be more volatile than those in developed countries. It lost 53% in 2008 and gained 76%in 2009. The fund has returned 1.36% over the past year,  2.85% annualized over the past three years, 0.67% annualized over the past five years, and 16.56% annualized over the past 10 years. Long-term, risk-tolerant investors who want to diversify their international portfolio may wish to consider this fund.

[caption id="attachment_658" align="aligncenter" width="616"] Vanguard Emerging Stock Market Index Performance[/caption]

Risks

Investing in a foreign market fund, in general, and emerging markets stock index fund, in specific, is not without risks. The fund’s exposure to in foreign stock markets can be riskier than U.S. stock investments. Also, the world events—such as political upheaval, financial troubles, or natural disasters—may adversely affect the value of securities issued by companies in foreign countries or regions. Finally, country/regional risk is especially high in emerging markets. The index’s, and therefore the fund’s, heavy exposure to China, Brazil, South Korea, and Taiwan subjects the fund to a higher degree of country risk than that of more geographically diversified international funds.

Expenses

The annual expense ratio of both the ETF (no minimum) and Admiral share classes ($10,000 minimum) of the Vanguard Emerging Markets Stock Index is just 0.18%, while the Investor shares' expense ratio is 0.33. So for every $10,000 invested, Vanguard charges a total of just $45 (for ETF and Admiral class) or $83 (Investor class) a year to manage this basket of stocks. This is so cheap that there is no way an individual investor could replicate the underlying holdings themselves for such a price.

Final Thoughts

Vanguard Emerging Markets Stock Index Fund provides a great way for long-term, buy and hold investors to diversify their international portion of their portfolio into emerging markets. Even though the fund is volatile, it also represents potential for growth. In general, emerging markets have been growing faster than developed markets. I expect the trend to continue. Since the fund is volatile, you may want to keep a small to moderate amount of asset allocation to this fund. As always, past performance is not a guarantee of the future returns.

Disclosure: I own Vanguard Emerging Markets Stock Index Fund Admiral Class shares in my portfolio. Also, see Vanguard Index Fund Portfolios for suggested portfolios.