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Vanguard Emerging Market ETF Kicks Off Index Transition


One of the most popular ETFs in early 2013, Vanguard FTSE Emerging Markets (VWO), has started its two-step transition to a new target index that was originally announced in October.

The fund now tracks a temporary FTSE benchmark, the FTSE Emerging Transition Index, and will complete the transition to its permanent benchmark later this year, Vanguard said.

VWO had originally tracked the same index as competitor iShares MSCI Emerging Markets (EEM). [Emerging Markets ETFs Set Pace for S&P 500]

EEM has attracted inflows of $3.3 billion so far in 2013, while VWO has gathered $839 million, according to IndexUniverse data. [Investors Flocking to Emerging Market ETFs Amid Rally]

In October, Vanguard said it planned to change the tracking benchmarks for 22 Vanguard funds and ETFs tied to indices managed by MSCI. They will move to benchmarks provided by FTSE and the University of Chicago’s Center for Research in Security Prices (CRSP). [Emerging Market ETF Battle: Vanguard vs. iShares]

“The transition from the previous benchmarks for these funds is being staggered over a number of months, with completion expected by mid-2013,” Vanguard said in a recent statement.

The fund giant says it has struck deals with FTSE and CRSP that will result in lower index-licensing fees, and the savings will be passed along to fund and ETF shareholders.

“We always try to create value for investors in our funds, and one of the ways we do this is by lowering investment costs,” said Vanguard CEO Bill McNabb. “Index licensing has become more expensive over the years, and we identified a high-quality benchmark that provides cost certainty and saves potentially hundreds of millions of dollars over time that can be passed on to investors.”

VWO, the emerging market ETF, will drop its exposure to South Korea as part of the index transition. The Vanguard ETF has $61.1 billion in assets versus $52 billion for EEM, which is managed by BlackRock’s (BLK) iShares. [Vanguard Emerging Market ETF to Drop South Korea]

Investors in some of Vanguard’s mutual funds and ETFs will end up with different portfolios than they may have long owned while others could see little impact resulting from the index transitions, S&P Capital IQ ETF analyst Todd Rosenbluth said in a note this week.

“Vanguard believes by shifting to new benchmarks, it can bring costs down over time for investors through lower trading activity. While this approach likely will fit with investor goals, we believe a close look at the Vanguard portfolios is needed to see if the holdings and sector weights make sense for them,” Rosenbluth said.

“[W]hen the benchmark they seek to replicate changes in 2013, there will likely be an impact. Whether this is a positive or negative remains unknown, but it is a risk investors need to be aware of,” the analyst wrote.

Full disclosure: Tom Lydon’s clients own EEM.

The opinions and forecasts expressed herein are solely those of John Spence, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.