VWO Begins Index Transition

The largest emerging markets ETF by assets has started its well-documented transition to a new index. On Thursday, the Vanguard MSCI Emerging Markets ETF (NYSE:VWO) changed its name to the Vanguard FTSE Emerging Markets ETF. "VWO" remains the ETF's ticker.

In October 2012, Vanguard, the third-largest U.S. ETF sponsor, announced it was dropping MSCI (NYSE:MSCI) indexes on 22 of its ETFs. That list included VWO and other well known Vanguard ETFs such as the Vanguard MSCI Europe ETF (NYSE:VGK).

As part of its transition to the FTSE Emerging Markets Index, VWO will track the FTSE Emerging Transition Index for approximately six months, according to a statement issued by Vanguard.

"This extended transition will reduce the costs associated with trading large amounts of securities in a short period," said Vanguard in the statement.

One of the issues surrounding VWO's switch to the FTSE Emerging Markets Index that garnered ample attention is FTSE Group's classification of South Korea as a developed market. That prompted some speculation that South Korean equities could come under selling pressure as Vanguard sold those stocks, including Samsung and Kia, to bring VWO inline with its new index.

However, the ETF sponsor is muting the impact of its South Korean stock sales through the use of the FTSE Emerging Transition Index.

"FTSE has designed a process of reducing the weight of Korea over a 25-week time horizon until all companies are removed," according data on the transition index published by FTSE Group. "Korea's weight at the start of the transition process will be adjusted on a weekly basis each Wednesday using a factor approach to reduce the index weighting of each Korean company. At the start of the index calculation companies will have a factor of 1 applied to their free float adjusted market capitalizations. From the start of the transition each week the factor will be reduced by 4 per cent. For example, on Wednesday of week 1 the factor will be reduced from 1 to 0.96, on Wednesday of week 2 from 0.96 to 0.92."

As of November 30, 2012, the FTSE Emerging Markets Index allocated 17.95 percent of its weight to China and 15.28 percent of its weight to Brazil. Taiwan had a weight of 13.24 percent and South Africa was next at just over 10 percent. With a weight of 9.62 percent, India was the index's fifth-largest country exposure on November 30.

The index also features exposure to Indonesia, Malaysia, Mexico, Chile, Colombia, Peru, the Philippines and Thailand, among others.

The index had 795 constituents as of the aforementioned date with financials receiving the largest sector weight at 19.58 percent and energy names coming in second at 13.25 percent. Familiar names among what could be some of VWO's top-10 holdings when the transition is complete include Taiwan Semiconductor (NYSE:TSM), America Movil (NYSE:AMX) and Petrobras (NYSE:PBR).

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