CRSP, the research center that’s part of the University of Chicago’s Booth School of Business, may soon become a well-known brand in the world of investments thanks to Vanguard Group’s decision to begin using CRSP indexes on 16 U.S.-focused Vanguard funds next year.
While any indexing-industry veteran knows the Center for Research in Security Prices is as prestigious a name as you can find, the deal with Vanguard announced this week marks the very first time the group has actually marketed investable indexes, and is the start to a new chapter in the group’s history.
CRSP is a nonprofit group of 75 academics and researchers that has been around since the mid-1960s generating data and benchmarks that were used primarily in the rarified air of academia. But the agreement with Vanguard will almost surely put CRSP on many investors’ radar screens for the first time.
Among the funds that CRSP will now provide indexes for is the $23.5 billion Vanguard Total Stock Market ETF (VTI)—an index-investing purist’s security that canvasses just about the entire U.S. stock market, and will cover a bit more of it once the transition to the CRSP US Total Market Index takes place.
“When indexing and ETFs became so popular, I think they looked at that and said, ‘We have the premier database here, so we could probably create some indexes and generate some profit for CRSP,’” Rick Ferri, founder of Troy, Mich.-based Portfolio Solutions and a well-known indexer said in an interview with IndexUniverse.
An introduction among friends years ago led to a collaboration with Vanguard that resulted in CRSP’s complete overhaul of its index product line, and of course the partnership on the 16 indexes that shook up the world of indexing this week , CRSP Chief Operating Officer David Barclay told IndexUniverse this week.
“This has been a long-term process,” Barclay said in the interview, echoing the thrust of what Vanguard Chief Investment Officer Gus Sauter told IndexUniverse; namely, that Vanguard’s decision to shift indexes on some of its funds has been in the works for quite some time.
Vanguard also decided to change indexes on six international funds to benchmarks provided by FTSE. When all the transitions are finished on the 22 funds, Vanguard is likely to save “millions” in licensing costs, according to Sauter.
On the losing end of both the FTSE and the CRSP deals is MSCI, which said the loss will cut $24 million of operating income from around $900 million in annual revenues.
Vanguard Stresses Cost Savings
Vanguard officials have gone to great lengths emphasizing that lower indexing licensing fees led it to decide to make the transitions to the both the FTSE and CRSP indexes.
They’ve downplayed any differences in returns between the indexes, stressing instead that costs can be controlled and that it intends to pass on whatever savings it realizes on the changes to investors.
No one seems willing to talk about the exact terms of the two indexing deals, so it’s not clear how much less than the $24 million it was forking over to MSCI that Vanguard will be paying FTSE and CRSP when all the transitions are complete sometime in 2013.
“This is a great day for investors,” Rodney Comegys, an executive in Vanguard’s Equity Investment group, said in a phone interview, epitomizing the gist of comments officials at the Valley Forge, Pa.-based firm have made to explain the index transitions.
Comegys emphasized that in the “pure-beta” pocket of index investing that Vanguard travels in, the differences from one broad index to another are likely to be minimal, and that investors are likely to respond more to low costs or the Vanguard brand name than the name of, say, an indexing firm.
Real Index Differences
While that may be the way investors and even advisors shop around for a fund these days, that doesn’t mean it’s the right way to go about it, CRSP’s Barclay said.
“Cost is exceedingly important right now to investors, because returns in general are very low,” Barclay offered. “But cost is certainly not the only aspect that matters.”
“You have to look at the underlying index very carefully,” he said of investors choosing a fund. “It’s often overlooked—a lot of people decide on an ETF based on a provider alone—but it’s important for investors to understand what a fund is investing in.”
One important methodology difference Barclay isolated is an asset-migration methodology CRSP calls “packeting” that’s designed to minimize trading costs to investors. The term is used to describe a slow transition of assets in terms of exposure between market capitalization segments.
For example, when a company moves from a midcap to a large-cap category, a CRSP index shifts only 50 percent of the allocation to that company into the next market-capitalization bracket and waits another quarter before shifting the remaining 50 percent.
The dual-step process is to prevent “surfing across the border,” as Barclay put it, by giving the company some time to solidify its stance in its new bracket. That lack of “surfing” means cheaper trading costs at the end of the day, he said.
“I like to compare this to a car’s shock absorbers,” Barclay said. “It keeps you from bouncing around unnecessarily.”
VTI:A Total Market Fund Again
Another difference that’s worth noting is that under the planned index changes, VTI will pick up another 0.5 percent of the U.S. investment universe total capitalization in the form of additional micro-cap holdings, Portfolio Solutions’ Ferri said.
“With CRSP, VTI is now going to be tracking a total market index,” he said, noting that in a period of outperformance for micro caps, VTI will again capture that move more completely than it has with the MSCI Broad Market Index as its benchmark.
More broadly, he said that while CRSP is new to the world of indexing, it’s as ready for its close-up as any firm could be.
“These CRSP indexes have had more time testing than the MSCI indexes when Vanguard adopted them,” Ferri said.
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