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Vanguard Index Changes Not Hurting Flows

Dave Nadig

It’s been an interesting time to be an index nerd since Vanguard went on the index-change warpath with its most popular ETFs.

And there are some significant lessons to be learned in analyzing investor behavior since the changes were announced.

To recap, back on Oct. 2, Vanguard started the fourth quarter of 2012 by announcing it would be migrating 22 index funds—of which 18 are available as ETFs—to new indexes. It will move away from MSCI indexes and organize the funds around CRSP and FTSE benchmarks .

At the time, we posted numerous articles and blogs analyzing what we thought the long-term effect would be on investors.

We also documented what seemed to be a reversal of the flows trend we saw throughout the past two years ; namely, money flowing into the Vanguard MSCI Emerging Markets ETF (VWO) and out of iShares’ competing product, the iShares MSCI Emerging Markets fund (EEM).

Along the way, we presented two webinars on the topic, one outlining the MSCI-to-FTSE switch and one documenting the logic behind the new CRSP U.S. Equity indexes . We also presented a counterpoint argument, talking with MSCI and iShares about the MSCI index series, the long-standing favorite in the international space .

But as we wrapped up 2012 here, I thought it worth taking a deeper dive into how these index changes shook out more than just in terms of investors. After all, none of the Vanguard ETFs has actually changed anything yet, as the transitions happen in this year.

The first place to focus, of course, is on flows. In digging through the year-end ETF flows, I grabbed just the 18 Vanguard ETFs in question, and looked at their flows since the announcement:

Vanguard ETFs


My initial reaction here is “no big deal.”

Vanguard had an amazing year, over all, pulling in more than $53 billion in assets. The fourth quarter in total was a good one, with Vanguard pulling in nearly $11 billion. These 18 funds represented $3.8 billion of that.

But if we dig a bit further under the hood, it’s interesting to compare the flows in a few specific funds, such as VWO vs. EEM. In this case, looking at a chart of the flows is more instructive than just the top-line numbers. (These charts come directly from our ETF Fund Flows Tool here on IndexUniverse.com.)




While there’s certainly no forensic chain here, it’s clear that the “bad” flows in VWO occurred in just a handful of days in November, which coincided—plus or minus a few days—with big inflows into EEM.

I’m reluctant to draw any kind of causal connection here between one trade and another, but it’s safe to say that some group of investors likely wanted to position themselves out of the soon-to-be-changing VWO and into EEM.

The fact that the flows have been into the 67-basis-point EEM, rather than the newly launched 18-basis-point iShares Core MSCI Emerging Markets ETF (IEMG) to me signals that this is “trading” money, not long-term buy-and-hold money. IEMG has pulled in just $169 million in net flows in the fourth quarter, suggesting that the money out of VWO hasn’t simply found a new home.



Further evidence that the switch from MSCI indexes to FTSE indexes isn’t a cause for panic can be found elsewhere in the product line.

Both the Vanguard MSCI EAFE ETF (VEA) and the Vanguard Total Stock Market ETF (VTI) had strong inflows in the face of the coming index changes.

VEA in particular has generated continuously strong interest, versus the occasional inflows we’ve seen in iShares’ competing product, the iShares MSCI EAFE ETF (EFA).



There’s nothing new about that.

Vanguard’s flows remained strong following the index change announcement—and particularly strong in the immediate eight weeks following.

Vanguard’s flows only waned in the final days of 2012, and I can spin several stories there, not the least of which might be aggressive tax-gain harvesting to try and take advantage of lower capital gains rates heading into the uncertain tax environment of 2013.

If you believe Vanguard money is long-term, sticky money, then it would make sense for December to have been a period of reshuffling.



At the time this article was written, the author held no positions in the securities mentioned. Contact Dave Nadig at dnadig@indexuniverse.com.


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