Do ETF Index Changes Impact Returns?

It is fair to say that ETF experts and casual followers of the asset class alike now know that Vanguard is changing indexes on 22 of its funds. The news jolted the ETF world last week as Vanguard said it is ditching 22 MSCI indexes in favor of FTSE indexes for six of its ETFs and new benchmarks developed by the University of Chicago's Center for Research in Security Prices (CRSP).

The move by Vanguard, the third-largest U.S. ETF sponsor, was treated as earth-shattering because it applies to marquee funds such as the Vanguard MSCI Emerging Markets ETF (NYSE:VWO), the Vanguard MSCI Europe ETF (NYSE:VGK) and the Vanguard Total Stock Market ETF (NYSE:VTI).

Vanguard said the index changes are designed to lower costs for investors. There is no doubt investors like lower fees, but the more important question is how index changes benefit (or hinder) returns. Fortunately, Vanguard is not the first ETF issuer to drop one set of indexes in favor of another. Here is a look back at how some ETFs performed after being tied to new benchmarks.

Global X NASDAQ China Technology ETF (NASDAQ:QQQC) In December 2011, the Global X NASDAQ China Technology ETF dropped the Solactive China Technology Index in favor of the NASDQ OMX Technology Index. The index change took place on December 15. Since then, QQQC has jumped 5.2 percent. Of course, there are other factors to consider such as market environment, risk appetite, sector preferences at the time and others, but QQQQ down 16.6 from the start of 2011 through the day before the ETF changed indexes.

PowerShares Global Water Portfolio (NYSE:PIO) The PowerShares Global Water Portfolio switched to the NASDAQ OMX Global Water Index from the Palisades Global Water Index in early March. In just over seven months since the index switch, PIO has dropped almost 1.9 percent.

Again, other factors have to be considered, but it is worth noting PIO jumped 12.3 percent from October 2011 through the day the index change was made in March 2011.

PowerShares Water Resources Portfolio (NYSE:PHO) Like its globally focused cousin, PIO, the PowerShares Water Resources Portfolio switched to a Nasdaq index in early March from a Palisades index. From October through the day of the index switch PHO was on fire, gaining almost 23 percent. Since the index change, PHO has gained five percent.

Combine that small gain with PIO's post-index change lethargy and it is evident that these two funds have probably been impacted more by some wind coming out of the sails of water stocks ore than index changes.

Five SPDRs Funds In late October 2011, five SPDRs funds dropped KBW indexes in favor of Standard & Poor's indexes. The affected funds are now known as the SPDR S&P Bank ETF (NYSE:KBE), SPDR S&P Capital Markets ETF (NYSE:KCE), SPDR S&P Insurance ETF (NYSE:KIE), SPDR S&P Mortgage Finance ETF (NYSE:KME), SPDR S&P Regional Banking ETF (NYSE:KRE).

In the case of all five of these ETFs, it would appear the index switches proved efficacious. The average gain for these funds since late October 2011 is almost 24 percent. However, it must be noted that financials services stocks have been on fire since then with the Financial Select Sector SPDR (NYSE:XLF) gaining 22 percent.

Another interesting factoid is the performance of the PowerShares ETFs that took on the KBW indexes dropped by State Street (NYSE:STT). The PowerShares KBW Bank Portfolio (NYSE:KBWB), PowerShares Regional Banking Portfolio (NYSE:KBWR), PowerShares Capital Markets Portfolio (NYSE:KBWC) and the PowerShares Insurance Portfolio (NYSE:KBWC) have an average gain of 20.3 percent since November 2011 when the funds came out using the KBW indexes.

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