Morningstar Key Indicators for Vanguard FTSE Emerging Markets ETF
- Morningstar Medalist Rating: Bronze
- Process Pillar: Average
- Human resources pillar: Above average
- Main pillar: High
- Prospectus net expense ratio: 0.07%
The Vanguard FTSE Emerging Markets ETF (VWO) features a diverse portfolio with a notably low expense ratio, which positions it to potentially outperform its peers in the Morningstar category over time. Still, there are geopolitical risks tied to emerging markets that can lead to unpredictable fluctuations.
This fund tracks the FTSE Emerging Markets All Cap China A Inclusion Index, which encompasses large-cap, mid-cap, and small-cap stocks from more than 20 emerging markets. Its market-capitalization weighted design mirrors the market’s collective valuation of stocks, allowing for lower turnover and transaction costs. The strategy includes a buffer on smaller companies to help reduce excessive trading. Occasionally, if investors get overly enthusiastic about a specific market segment, the index might increase its stake in pricier stocks, but this doesn’t seem to affect its long-term success.
It’s worth noting that definitions of emerging markets can differ based on the index or fund provider. For instance, FTSE notably excludes South Korea from this fund, while many competitors typically hold around 10% in South Korean stocks. However, the wide diversification within the portfolio minimizes the weight of any single market or stock, keeping performance aligned with the average in the category. The fund’s extensive roster of about 5,000 stocks mitigates concentration risk, with the top 10 holdings usually making up about 20% to 25% of assets. Vanguard transitioned to this target index in 2016 and broadened its focus to include domestically traded China A shares.
Emerging markets often contend with higher geopolitical risks than their developed counterparts. A notable example occurred in February 2022, when FTSE excluded Russian stocks from its index, forcing the fund to drop its allocation to Russia entirely, which adversely affected returns. While the fund’s exposure to Russian stocks was minimal at the time, the situation illustrates how geopolitical dynamics can impact funds in emerging markets. Furthermore, many state-owned enterprises in these markets may not prioritize the interests of general shareholders.
All share classes within the fund belong to the lowest-cost quintile of their categories, helping them outperform the category average from their inception through December 2025. This exceptionally low cost structure is likely to yield sustained benefits.
Vanguard FTSE Emerging Markets ETF: Performance Highlights
From its launch in 2005 until December 2025, the ETF share class of the fund outperformed its category average by 38 basis points annually. Its risk-adjusted performance aligns closely with the category average during this timeframe. The fund holds a larger position in emerging Asian markets like Taiwan, which has augmented returns recently.
Country and regional allocations will significantly affect the fund’s performance going forward. Taiwan’s strong performance has persisted into 2025, with the Taiwanese stock market riding a winning streak in 2024, aided by the substantial growth of Taiwanese semiconductor company TSMC. However, the fund missed out on the nearly 100% annual rise in South Korean stocks in 2025, leading to it trailing the category average by 5.6 percentage points. Although the gap closed somewhat in 2024, it remains noteworthy.
The fund’s significant country exposures can sway short-term relative performance, but its wide-ranging investments should ease long-term volatility. Overall, its returns generally align with the category’s average, and the low fees in combination with minimal cash drag should help maintain its competitive edge over time.
