VEA vs IEFA: Why Index Construction Matters for Global Diversification

In the pursuit of global diversification, investors often gravitate toward exchange-traded funds () that offer broad exposure to developed markets. Two of the most popular options-Vanguard FTSE Developed Markets ETF (VEA) and iShares Core MSCI EAFE ETF (IEFA)-share similar objectives but diverge significantly in cost efficiency, geographic coverage, and index construction. For long-term investors prioritizing low fees and comprehensive diversification, VEA emerges as the superior choice. This analysis delves into the structural advantages of VEA, supported by performance, holdings, and ESG data, to underscore why its design better aligns with the goals of a globally diversified portfolio.

Cost Efficiency: VEA's 0.03% Edge

Cost efficiency is a cornerstone of long-term investment success. VEA's expense ratio of is half that of IEFA's , a difference that compounds meaningfully over time. For example, , . This cost advantage, while seemingly minor, directly enhances net returns and reduces the drag on portfolio growth. According to a report from PortfoliosLab, VEA's lower fees make it a more attractive option for investors seeking to maximize capital efficiency.

Geographic Diversification: Broader Coverage Matters

VEA's geographic footprint extends beyond the EAFE (Europe, Australasia, and the Far East) region to include Canada and South Korea, which IEFA excludes. This inclusion is critical for two reasons:
1. Canada's Economic Resilience: As the world's 10th-largest economy, Canada contributes significant exposure to energy, financials, and natural resources, sectors that buffer volatility in other regions.
2.

South Korea's Innovation-Driven Growth: South Korea's dominance in technology (e.g., semiconductors, automotive) adds a high-growth component to VEA's portfolio, diversifying risk beyond traditional EAFE staples like Europe and Japan.

By contrast, IEFA's EAFE-only focus limits its geographic breadth, potentially exposing investors to regional imbalances. For instance, during periods of European economic slowdown, IEFA's concentration in the region could underperform VEA's more balanced global approach.

Index Construction: Small-Cap Exposure Enhances Diversification

VEA's tracking of the distinguishes it from IEFA's . The former includes large-, mid-, and small-cap stocks, while the latter focuses primarily on large and mid-cap equities. This structural difference translates to , offering deeper diversification. Small-cap stocks, though riskier individually, reduce portfolio concentration risk and capture growth in less-followed markets. For investors seeking broad exposure without overreliance on megacap stocks, VEA's construction is a clear advantage.

Performance: Cumulative Gains Favor VEA

While both ETFs are highly correlated, VEA has consistently outperformed IEFA in recent periods. As of November 2025, VEA's year-to-date return of exceeds IEFA's . This performance edge, combined with its lower fees, amplifies the compounding effect over decades. A 2025 analysis by Mezzi notes that VEA's broader diversification and cost efficiency contribute to its slight but persistent outperformance.

ESG Considerations: A Balanced Perspective

Though not the primary focus of this analysis, ESG metrics provide additional context. VEA's ESG score of (86.36% global percentile) and IEFA's (87.40% global percentile) indicate strong sustainability profiles. However, VEA's inclusion of Canadian and South Korean markets-regions with robust ESG frameworks-enhances its governance and social metrics. Conversely, . . For investors prioritizing ESG alignment, these nuances may influence decisions, but VEA's overall diversification and cost benefits remain compelling.

Conclusion: VEA as the Optimal Choice

For investors seeking cost-efficient, globally diversified exposure to developed markets, VEA's structural advantages are hard to ignore. Its , broader geographic coverage, and inclusion of small-cap stocks create a more resilient and diversified portfolio compared to IEFA's EAFE-centric, higher-cost approach. While IEFA remains a viable option, VEA's combination of low fees, comprehensive diversification, and superior performance makes it the superior choice for long-term, globally minded investors.