Key Morningstar Metrics for Vanguard Emerging Markets Stock Index
- Morningstar Medalist Rating: Bronze
- Process Pillar: Average
- People Pillar: Above Average
- Parent Pillar: High
Vanguard Emerging Markets Stock Index’s VEMAX broad portfolio and rock-bottom expense ratio should help it outperform Morningstar Category peers over the long haul. Investors should still be aware of the higher degree of geopolitical risks in emerging-markets stocks, which can introduce unwanted volatility.
The fund tracks the FTSE Emerging Markets All Cap China A Inclusion Index, which includes large-, mid-, and small-cap stocks from more than 20 emerging economies. The portfolio excludes Korean stocks because FTSE classifies South Korea as a developed market. Its market-cap-weighted approach benefits investors by capturing the market’s collective opinion of each stock’s value while mitigating turnover and trading costs. Occasionally, it will increase the fund’s exposure to expensive stocks when investors get excited about an area of the market, but that doesn’t undermine its long-term efficacy. FTSE institutes a buffer around the lower market-cap boundary to further limit excessive trading.
The portfolio’s extensive diversification helps mitigate the impact of the worst-performing stocks. As of November 2024, it held nearly 5,000 names, and its 10 largest positions accounted for around 20% of its assets. Vanguard changed this fund’s target index to its current bogy in 2016, so it has provided exposure to locally traded China A-shares since that time, further expanding its reach.
Chinese stocks accounted for over 29% of the portfolio as of November 2024. While this represents the relative size and importance of the Chinese equity market, it could also expose the fund to country-specific risk.
In general, emerging markets face greater geopolitical risks than their developed counterparts. The recent Russia-Ukraine war highlights such risk. Shortly after the invasion, FTSE removed Russian stocks from the fund’s target index, and the fund marked its Russian allocation down to zero. Russian stocks represented less than 3% of the fund at the end of January 2022, so the effect on performance was somewhat muted.
The annual fees on all the fund’s share classes fall in the cheapest quintile, which has helped them outperform the diversified emerging-markets category average from inception through November 2024. This is one of the least expensive funds in the category, and its ultralow price tag should provide a durable advantage.
Vanguard Emerging Markets Stock Index: Performance Highlights
The fund’s exchange-traded fund share class modestly outperformed the diversified emerging-markets category average by 57 basis points annualized from its 2005 inception through April 2025.
The fund’s risk-adjusted performance was comparable to the average category peer over this period. Much of this can be attributed to its lower-than-average fee, low cash drag, and overweight in emerging Asian markets. These markets, particularly Taiwan and China, were major contributors to the fund’s excess returns over the past decade.
Country and regional exposure has been and will continue to be an important influence on the fund’s performance. Its allocations worked out well in 2024, earning the fund 5.2 percentage points in excess returns over the category average for the whole year. Its overweight position in Taiwan paid off handsomely in 2024 as the Taiwanese stock market rode the artificial intelligence wave and posted an explosive rally in 2024. The Chinese stock market also jolted back to life after the September 2024 stimulus. However, these same tilts hurt the fund during the tariff-driven market wobble in April 2025, as Asian markets were heavily affected.
Moving forward, the fund’s largest country exposure will continue to influence its category-relative performance. Active category peers might be able to use stock selection to better weather volatile periods, though the fund’s broad scope should lessen the magnitude of its underperformance.
