NEW YORK (TheStreet) -- Even if they have similar names, exchange-traded funds that cover the same market can be very different.
The Vanguard FTSE Emerging Markets ETF (VWO) - Get Report and the iShares MSCI Emerging Markets ETF (EEM) - Get Report sound like they could be similar ETFs. But there are important distinctions that lead to different performances.
The main difference is that the two ETFs track different indexes. The Vanguard ETF, the largest in emerging markets by assets, tracks the FTSE Emerging Markets Index. The iShares ETF, which is the second-largest, is benchmarked to the MSCI Emerging Markets Index.
Vanguard, in fact, announced in 2012 that it was dropping MSCI indexes for 22 of its ETFs and using the FTSE benchmarks instead. That included the emerging markets ETF.
The move proved to be a good one. The Vanguard emerging markets ETF rose 17.5% from July 2013 to mid-April 2015, or 3.2 percentage points better than the iShares ETF. And in just the past year, the Vanguard ETF was up 9.3% compared with 5.3% for the iShares fund.
They key difference is that the FTSE index doesn't include South Korea as an emerging market, while the MSCI index does.
Fees also contribute to the performance difference. The Vanguard fund's annual fee is 0.15%, or just $15 of every $10,000 invested. The iShares fund charges a much higher 0.69% per year, or $69 of every $10,000 invested.
For traders looking to move in and out of ETFs in a matter of days or weeks, fees don't matter. For long-term investors, though, higher fees sap returns over time.
iShares tried to stem the exodus of money from its fund to the Vanguard fund in 2012 by introducing a slightly different emerging markets fund. It's called the iShares Core MSCI Emerging Markets ETF (IEMG) - Get Report.
The two iShares funds have only slight differences in how they weigh different countries and sectors. But the Core fund charges just 0.18% per year, which is much closer to the Vanguard fee.
This article is commentary by an independent contributor. At the time of publication, the author held shares in the Vanguard FTSE Emerging Markets ETF.