Vanguard Dropping VWO's MSCI Index

Vanguard, the third-largest U.S. ETF issuer, announced it is shifting to an index managed by the FTSE Group for the Vanguard Emerging Markets ETF (NYSE:VWO). The Vanguard Emerging Markets ETF, the largest emerging markets ETF and third-largest ETF of any kind trading in the U.S., has to this point been benchmarked to the MSCI Emerging Markets Index.

Vanguard is changing indexes on 21 other products in what is being deemed a cost-cutting move. The move away from the MSCI Emerging Markets Index is significant because the comparable FTSE index does not recognize South Korea as a developing nation. MSCI still sees South Korea as an emerging market, though there is ample debate regarding whether that classification is still warranted.

The iShares MSCI Emerging Markets Index Fund (NYSE:EEM), VWO's nearest competitor, allocates 15.4 percent of its weight to South Korea. That makes the country the second-largest in the ETF behind China, according to iShares data. EEM will continue using the MSCI Emerging Markets Index.

"MSCI is the gold standard of global and international equity indexes the near-universal choice of professional investors. We plan to deepen our partnership with MSCI to help deliver the highest quality products and portfolio construction to our clients," said Mark Wiedman, global head of iShares, in an email to members of the media.

U.K.-based FTSE classifies the following nations as advanced developing economies: Brazil, Czech Republic, Hungary, Malaysia, Mexico, Poland, South Africa, Taiwan and Turkey. The following are classified as secondary emerging nations: Chile, China, Colombia, Egypt, India, Indonesia, Morocco, Pakistan, Peru, the Philippines, Russia, Thailand and the United Arab Emirates.

China and Brazil combine for nearly 33 percent of the FTSE Emerging Markets Index's weight, according to FTSE data. Taiwan and South Africa are the next largest country allocations with a combined weight of nearly 24 percent.

Other index providers, including Standard & Poor's, also recognize South Korea as a developed nation.

Although VWO is younger than EEM, the former has been able to become larger than its rival by virtue of lower fees. VWO charges 0.2 percent per year compared to 0.67 percent for EEM. Now, the Vanguard fund may have another weapon in its asset-gathering arsenal: Performance.

FTSE data show that over the past three years, the FTSE Emerging Markets Index has outperformed the MSCI equivalent. The MSCI index has a three-year standard deviation of 22.75 percent. The FTSE index has a three-year volatility of 21.4 percent based on weekly, according to FTSE.

Vanguard will also drop MSCI indexes on the Vanguard MSCI Europe ETF (NYSE:VGK) and the Vanguard Total Stock Market ETF (NYSE:VTI), the company said in a statement.

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