Home Latest Commentary chevron_right Adviser Fund Update Vanguard to Change Benchmark Indexes October 12, 2012 Vanguard to Change Benchmark Indexes The ongoing price war among the leading providers of index funds and ETFsA type of security which allows investors to indirectly invest in an underlying basket of financial instruments (these may include stocks, bonds, commodities or other types of instruments). Shares in an ETF are publicly traded on an exchange, and the price of an ETF’s shares will fluctuate throughout the trading day (traditional mutual funds trade only once a day). For example, one popular ETF tracks the companies in the S&P 500, so buying a share of the ETF gets an investor exposure to all 500 companies in the index. spurred Vanguard to find new, lower-priced benchmark indexes for 22 of its index funds and ETFs. The changes, which affect signature funds such as Total StockA financial instrument giving the holder a proportion of the ownership and earnings of a company. Market Index and Emerging Markets Index, will take place over several months and are not expected to be completed until well into 2013 (a list of affected funds appears below). For 16 domestic funds and ETFs, Vanguard is dropping MSCI indexes in favor of indexes developed by the Center for Research in Security Prices (CRSP), a research department at the University of Chicago Booth School. Approximately $367 billion in assets will be affected (MSCI’s stockA financial instrument giving the holder a proportion of the ownership and earnings of a company. dropped 27% on the news). While CRSP data is well known among academic researchers, this is their first foray into actual index product development. We have reviewed some back-tested data from CRSP and our initial findings show that the MSCI and CRSP indexes have had very similar performance. For the six international index funds and ETFs affected, Vanguard is exchanging MSCI in favor of London-based FTSE. This change will affect $170 billion in assets under management at Vanguard. One notable difference here is that MSCI classifies South Korea as an emerging market while FTSE considers it to be a developed country. As of the end of August, South Korea was the second-largest country allocation in Emerging Markets Index at 15.5% of the portfolio, so the difference is significant, and investors will likely see a change in the fund’s composition as a result. Index providers such as MSCI and FTSE are responsible for deciding which companies are included in their various benchmarks and how their stocksA financial instrument giving the holder a proportion of the ownership and earnings of a company. are weighted. They earn licensing fees from mutual fund companies and ETFA type of security which allows investors to indirectly invest in an underlying basket of financial instruments (these may include stocks, bonds, commodities or other types of instruments). Shares in an ETF are publicly traded on an exchange, and the price of an ETF’s shares will fluctuate throughout the trading day (traditional mutual funds trade only once a day). For example, one popular ETF tracks the companies in the S&P 500, so buying a share of the ETF gets an investor exposure to all 500 companies in the index. providers, typically a small percentage of assets under management. Vanguard was able to negotiate a lower price for licensing the various indexes from FTSE and the CRSP, which should translate into lower operating costs for its index funds and ETFs. Comparison Shopping Vanguard has shopped index providers in search of a better deal before. In April 2003, it began transitioning funds that tracked S&P indexes to the MSCI indexes it is now dumping. At that time, Vanguard’s Gus Sauter said, “As the leading manager of index mutual funds for more than 25 years, we have formulated certain views of what makes for optimal index construction. The MSCI indexes incorporate most of the best practices we seek…” When announcing the recent shift away from MSCI, Sauter said that the new indexes from FTSE and CRSP “…meet Vanguard’s ‘best practice’ standards for market benchmarks.” Are the new indexes any better? It depends how you define “better” but we don’t find any compelling advantages held by the CRSP or FTSE indexes over those from MSCI. But they are definitely cheaper–or at least the costs to license the indexes will be cheaper. Faced with its first real competitive threat from the likes of Charles Schwab, which recently lowered index fund costs below Vanguard’s already-low prices, Vanguard is not going to let another company seize the mantle of “lowest cost provider” from its shoulders. Vanguard says that the changes should not result in capital gains for current shareholders. With the exception of Emerging Markets Index, we do not believe that investors in the funds will notice much of a difference as the changeover occurs. While the moves are not directly related to improving performance, once the lower expense ratios are instated, investors will get to keep more of their earnings (if only a fractional amount). This kind of investor-friendly, cost-saving move is something that we like to see at Adviser Investments and is part of what has kept Vanguard a leader in the mutual fund marketplace. About Adviser Investments Adviser Investments operates as an independent, professional wealth management firm with expertise in Fidelity and Vanguard funds, actively managed mutual funds, ETFs, fixed-income investing, tactical strategies and financial planning. Our investment professionals focus on helping individual investors, trustsA legal document that functions as an instruction manual to how you want your money managed and spent in your later years as well as how your assets should be distributed after your death. Assets placed in a trust are generally safe from creditors and can be sold by the trustee in short order, avoiding the lengthy and costly probate process., foundations and institutions meet their investment goals. Our minimum account size is $350,000. For the fifth consecutive year, Adviser Investments was named to Barron’s list of the top 100 independent financial advisers nationwide and its list of the top advisory firms in Massachusetts in 2017. We have also been recognized on the Financial Times 300 Top Registered Investment Advisers list in 2014, 2015 and 2016. For more information, please visit www.adviserinvestments.com or call 800-492-6868. Disclaimer: This material is distributed for informational purposes only. The investment ideas and expressions of opinion may contain certain forward-looking statements and should not be viewed as recommendations, personal investment advice or considered an offer to buy or sell specific securities. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed. Our statements and opinions are subject to change without notice and should be considered only as part of a diversified portfolio. You may request a free copy of the firm’s Form ADV Part 2, which describes, among other items, riskThe probability that an investment will decline in value in the short term, along with the magnitude of that decline. Stocks are often considered riskier than bonds because they have a higher probability of losing money, and they tend to lose more than bonds when they do decline. factors, strategies, affiliations, services offered and fees charged. Past performance is not an indication of future returns. The tax information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice. We do not provide legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation. The Barron’s rankings consider factors such as assets under management, revenue produced for the firm, regulatory record, quality of practice and philanthropic work. This award does not consider client experience and is not indicative of future performance. Editors at the Financial Times bestowed “elite” status on 300 firms in the U.S., as determined by assets under management, asset growth, longevity, compliance record, industry certifications and online accessibility. © 2018 Adviser Investments, LLC. All Rights Reserved.