Vanguard Group, the largest U.S. mutual fund provider, is abandoning MSCI indexes in favor of alternative benchmarks for 22 of its largest index mutual funds and ETF shares.
The switch is expected to result in cost savings to Vanguard's shareholders via lower expense ratios because of lower index licensing fees.
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"Our structure, along with our ongoing commitment to keep operating costs at the lowest reasonable levels, leads to low expenses that are enduring in nature," said Vanguard Chief Investment Officer Gus Sauter. "Vanguard is the mutual fund industry's only client-owned firm that manages its funds and ETFs at cost." (VIDEO: What the Dow Transports are saying about the Stock Market.)
Vanguard plans to transition six international stock index funds with aggregate assets of $170 billion to FTSE benchmarks. Included in this group is the Vanguard Emerging Markets Stock Index Fund and its ETF share class (VWO). VWO will switch from the MSCI Emerging Markets Index to the FTSE Emerging Index. Also, the MSCI All Country World ex-USA Investable Market Index (VXUS) will be replaced by the FTSE Global All Cap ex-US Index.
Sixteen U.S. stock and balanced index funds with aggregate assets of $367 billion will be tied to new benchmarks developed by the University of Chicago's Center for Research in Security Prices (CRSP). The Vanguard Total Stock Market Index Fund (VTI) will switch to the CRSP US Total market Index.
Fee reductions have been a boon to ETF investors and Vanguard's move is largely due to structural changes within the ETF industry as fund companies battle for assets by reducing management fees. Last month, Charles Schwab (SCHW) cut costs on its lineup of 15 ETFs to as low as 0.04%. In coming months, BlackRock (BLK) is expected to reduce fees on its iShares ETFs. (Global Investment Theme Report inside the October 2012 ETF Profit Strategy Newsletter.)
The asset allocations for the Vanguard funds changing indexes will not change. Also, the transition to the new benchmarks is not expected to result in capital gains distributions to the funds' shareholders, according to Vanguard analysis based on current market conditions.
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Vanguard's decision to go with FTSE is a blow to MSCI (MSCI), which generated around $24 million in annual revenue and operating income from Vanguard index funds. In 2003 Vanguard dumped higher cost indexes provided by McGraw-Hill Company's (MHP) S&P unit in favor of MSCI benchmarks. Now, MSCI is the one being cut.
The index transitions will be staggered and MSCI said the switch is expected to occur in phases starting in January 2013.
No changes are planned for Vanguard U.S. stock index funds linked to Russell and S&P benchmarks, or the 11 Vanguard sector equity funds currently seeking to track MSCI benchmarks.
The benchmarks for Vanguard's Target Retirement, LifeStrategy (Nasdaq:VASGX), and Managed Payout Funds and other funds of funds will also change.
"The indexes from FTSE and CRSP are well constructed, offer comprehensive coverage of their respective markets, and meet Vanguard's 'best practice' standards for market benchmarks," said Sauter.
Sauter noted that index licensing fees have represented a growing portion of the expenses that investors pay to own index funds but that the long-term agreements with FTSE and CRSP will provide cost certainty going forward with these two index providers.
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