Vanguard vs iShares: Which is the Better International ETF?

Written by Dave Kovaleski for The Motley Fool->

Vanguard FTSE Developed Markets ETF includes Canadian equities and maintains a lower expense ratio of 0.03%.

iShares Core MSCI EAFE ETF excludes North American exposure entirely and currently provides a higher trailing-12-month dividend yield.

Vanguard FTSE Developed Markets ETF holds over 1,200 more companies than its iShares counterpart, resulting in deeper exposure to small-cap international firms.

The Vanguard FTSE Developed Markets ETF (NYSEMKT:VEA) offers lower costs and broader geographic reach including Canada, while iShares Core MSCI EAFE ETF (NYSEMKT:IEFA) concentrates strictly on overseas developed markets with a higher trailing distribution yield.

These two funds are among the most popular vehicles for investors seeking growth outside the United States. While they both focus on established international markets, subtle differences in their index construction -- specifically regarding Canadian exposure and the inclusion of smaller companies -- can lead to divergent performance outcomes over the long term.

Beta measures price volatility relative to the S&P 500; beta is calculated from five-year monthly returns. The 1-yr return represents total return over the trailing 12 months. Dividend yield is the trailing-12-month distribution yield.

The Vanguard fund is the more affordable option, costing just $3 per year for every $10,000 invested. While the iShares fund is also competitively priced, its primary appeal may lie in its 3.30% dividend yield, which represents a 0.62 percentage point premium over its peer.

The iShares Core MSCI EAFE ETF (NYSEMKT:IEFA) provides exposure to 2,621 developed market stocks across Europe, Australia, and the Far East, intentionally omitting the United States and Canada. Its top holdings include ASML Holding NV (NYSE:ASMl) at 2.74%, HSBC Holdings PLC (NYSE:HSBC) at 1.27%, and Roche Holding AG (SIX:ROP.SW) at 1.14%. This fund, which launched in 2012, is heavily weighted toward financial services at 23.00%, industrials at 20.00%, and technology at 12.00%. It has paid $3.18 per share in dividends over the trailing 12 months.

The Vanguard FTSE Developed Markets ETF (NYSEMKT:VEA) tracks a different index that includes approximately 7.50% exposure to Canadian equities, contributing to a larger pool of 3,873 holdings. Its largest positions include Samsung Electronics Co. Ltd. (KRX:005930) at 2.26%, ASML Holding NV at 1.78%, and SK Hynix Inc. (KRX:000660) at 1.54%. Launched in 2007, the portfolio mirrors its peer with 23.00% in financial services, 19.00% in industrials, and 14.00% in technology. It has a trailing-12-month dividend of $1.88 per share.

For more guidance on ETF investing, check out the full guide at this link.

These two ETFs are similar in that they are highly diversified, all-cap, broad market international funds that tap into developed markets.

But there is one key difference, the Vanguard ETF includes stocks from Canada, while the iShares fund does not, omitting stocks from North America entirely. And its not an insignificant difference as 11.2% of VEA’s portfolio is from Canada, making it the third most represented country in the portfolio after Japan (21%) and the United Kingdom (12%).

The iShares ETF, in contrast, has larger stakes in Japan (25%) and the UK (14%) with France as the third most represented country at 9%.

I think that is an important distinction not just from a diversification standpoint, but from a performance perspective, too. The Vanguard ETF has been the better performer over most time frames, returning 25% over the past 12 months compared to 16% for IEFA. Over the past three years, VEA has an average annualized return of 15% to 13% for IEFA, and the outperformance extends out to both the five-year and 10-year time frames.

And with a lower expense ratio, the Vanguard ETF looks like the better option.

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HSBC Holdings is an advertising partner of Motley Fool Money. Dave Kovaleski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard FTSE Developed Markets ETF. The Motley Fool recommends HSBC Holdings. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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