Performance Disparity Between EM Share Classes VWO and VEMAX

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Northern Flicker
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Performance Disparity Between EM Share Classes VWO and VEMAX

Post by Northern Flicker »

VEMAX holds the Admiral shares of the Vanguard EM index fund. VWO is the ETF share class.

Over the last 2.5 years, there has been a considerable disparity in performance between them. In 2022 they have been equal through the end of July, VEMAX was a bit better in 2020, but in 2021 there was a sizable advantage to VWO.

https://www.portfoliovisualizer.com/bac ... ion2_2=100

https://www.portfoliovisualizer.com/bac ... ion2_2=100

https://www.portfoliovisualizer.com/bac ... ion2_2=100

Usually the ETF share classes of Vanguard index funds are slightly less volatile than the ETF share classes, but the opposite relationship has held between VEMAX and VWO since 2020.

Over the lifespan of VWO, the situation has been normative, with the ETF achieving a couple of basis points of advantage with very slightly higher volatility.

https://www.portfoliovisualizer.com/bac ... ion2_2=100
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vineviz
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Re: Performance Disparity Between EM Share Classes VWO and VEMAX

Post by vineviz »

Northern Flicker wrote: Tue Aug 09, 2022 12:47 pm Over the last 2.5 years, there has been a considerable disparity in performance between them.
I guess "considerable disparity" is in the eye of the beholder. The difference in returns between the two share classes in recent years (i.e. 20-30bps) is not out of line with history or with what I would expect to observe.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Northern Flicker
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Re: Performance Disparity Between EM Share Classes VWO and VEMAX

Post by Northern Flicker »

Given that it is an outlier in comparison to some other Vanguard dual-share-class funds, it is not what I would have expected. VXUX/VTIAX saw a 38 bp disparity in 2021, also surprising to me:

https://www.portfoliovisualizer.com/bac ... ion2_2=100

VEA was smaller, around 24 bp in 2021:

https://www.portfoliovisualizer.com/bac ... ion2_2=100

But VTI and VTSAX tracked closely:

https://www.portfoliovisualizer.com/bac ... ion2_2=100

I guess this is evidence of lower liquidity and barriers to arbitrage of ETF shares and the underlying baskets?
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vineviz
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Re: Performance Disparity Between EM Share Classes VWO and VEMAX

Post by vineviz »

Northern Flicker wrote: Tue Aug 09, 2022 1:02 pm Given that it is an outlier in comparison to some other Vanguard dual-share-class funds, it is not what I would have expected.
Since inception, the average annual differential between VWO and VEMAX is about 36 bps.

For a 12 month period, anything less than 100bps is noise.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Northern Flicker
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Re: Performance Disparity Between EM Share Classes VWO and VEMAX

Post by Northern Flicker »

Jan 2021 saw a gap in excess of 20 bp for the month. I've seen sizable daily differences due to fair value pricing of the MF shares, and significant discounts and premiums to NAV for the ETF, but I would have expected a year to be a long enough period to smooth these out.
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Re: Performance Disparity Between EM Share Classes VWO and VEMAX

Post by Northern Flicker »

I suppose new disparities are being created simultaneously with old ones being smoothed out. This does not enhance my excitement about EM equity as an asset class. Is past behavior a reasonable estimator for quantifying the associated risk?
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Re: Performance Disparity Between EM Share Classes VWO and VEMAX

Post by grabiner »

ETFs can trade at a premium or discount, and the premium or discount tends to be higher for international ETFs, as the underlying markets are closed and thus any NAV is an estimate.

If the ETF traded at a discount on 12/31/20, that discount decreased its 2020 returns, but increased its 2021 returns by an equal amount. If you compare the ETF and mutual fund between two days that the ETF traded at NAV, the returns would be equal except for any expense difference. If you compare them between any two days, the difference in returns is the difference between the premiums on those two days, so it becomes a smaller annualized difference for a long-term investment.
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vineviz
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Re: Performance Disparity Between EM Share Classes VWO and VEMAX

Post by vineviz »

grabiner wrote: Wed Aug 10, 2022 9:27 pm If you compare the ETF and mutual fund between two days that the ETF traded at NAV, the returns would be equal except for any expense difference.
Other differences can manifest, since the open-end fund is internalizing transaction costs whereas the ETF is externalizing them.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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