What are you trying to do? Attach storage to the VM or the Host?
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It's similar to say "is better a VMFS or a RDM disk?"
From a performance point of view could be a minimal difference.
From a feature point of view you loose some features (for example you cannot use VCB or similar backup on guest iSCSI disks), but you can have new features (for example use storage snapshots or have a Failover Cluster 2008 also on a ESX 3.x).
while reading about MPIO and esxi multipath (both with MS iSCSI target) seems that MS initiator with vmxnet3 net card outperform throughput of ESXi iSCSI sw initiator (Windows 2008 guest). Having a iscsi maped inside a VM have some advantage, so I'm tryin to identify if exist a real advantage in terms of I/O.
Well... MS did much better job