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Vanguard Emerging Market ETF to Drop South Korea


Vanguard’s decision to change the tracking benchmark at Vanguard MSCI Emerging Markets (VWO) to lower the fund’s costs means the ETF will be dropping its exposure to South Korea.

Vanguard’s plans to transition VWO to an index managed by FTSE will have an impact. South Korea has about a 16% weighting in MSCI’s emerging markets index, whereas South Korea is considered a developed market by FTSE, according to a recent report. [Vanguard Shift Puts Focus on ETF Benchmarks]

“Some investors are worried that South Korea is about to vanish—and it has nothing to do with tanks or communism,” reports Ian Salisbury at WSJ.com.

Vanguard’s index switch, which was announced in early October, has ramifications for institutional investors that are benchmarked to MSCI indices. “More important, say critics, returns in the emerging-markets ETF could trail its peers if South Korean stocks continue to rise,” Salisbury writes.

Since the end of October, VWO has seen outflows of $886 million, according to IndexUniverse data. The iShares MSCI Emerging Markets (EEM) has pulled in about $4.9 billion for the same period.

Vanguard points out that its emerging market fund, VWO, offers cost savings for investors and advisors. VWO has an expense ratio of 0.2% compared with 0.67% for EEM. BlackRock recently launched iShares Core MSCI Emerging Markets ETF (IEMG) , which has an expense ratio of 0.18%. [Vanguard Emerging Market ETF Sees Heavy Outflow]

In the WSJ story, Vanguard principal Joel Dickson said the company’s move prompted “some pushback” from customers, but says the new licensing deal lowers costs. He added that investors who still want exposure to South Korea can buy Vanguard’s developed-markets ETF.

The Vanguard ETF remains the largest emerging market fund with $59 billion compared with $45.2 billion for EEM, according to XTF.

On Oct. 2, Vanguard said it would drop MSCI indices at 22 of its ETFs and substitute two other index providers, in the belief that by doing so it could achieve “considerable savings for the funds’ shareholders over time,” Institutional Investor reports.

Vanguard has played the index transition schedule close to the vest.

“We’re not saying exactly when the transitions will begin in order to prevent front-running,” Vanguard’s Dickson told Institutional Investor. “The transitions will be staggered over several months,” while the VWO change “will take longer than the other funds because it will be divesting all of its holdings in South Korea and investing the proceeds in some markets that are less liquid.”

Full disclosure: Tom Lydon’s clients own EEM.

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