Vanguard completed the transition of its $47 billion emerging markets equities fund VWO to an index created by FTSE, completing a six-month shift away from a MSCI benchmark that's designed to lower costs for investors. Vanguard set the entire process in motion on Oct. 2 of last year , and VWO begins tracking the new index on June 28.
The completion of VWO’s index change puts to bed the entire 22-fund benchmark-transition project, which set the indexing and ETF worlds abuzz about the importance of fees and benchmarks. Last autumn was full of price-cutting announcements from top ETF providers, including Charles Schwab and BlackRock’s iShares , putting focus on just how cheap ETFs are relative to mutual funds.
The benchmark transition of the Vanguard FTSE Emerging Markets ETF (VWO) was always the centerpiece of that Oct. 2 announcement, because the portfolio is so big and because VWO was losing a sizable 15 percent allocation to South Korea in the change due to the fact that FTSE, unlike MSCI, no longer defines Korea as a developing country.
That 15 percent South Korea allocation was deemed to be large enough as to necessitate the creation of a temporary index that would help Vanguard pull off the benchmark change in a way that didn’t allow for opportunistic traders to front-run the order flow that the shift would create. By all signs, VWO’s Valley Forge, Pa.-based sponsor achieved its objective of managing a stealthy transition.
“During its six-month transition, [VWO] tracked a custom benchmark, the FTSE Emerging Transition Index, so that the portfolio management team could implement the transition cost-effectively with minimal market impact and negligible tracking error, as well as to enable shareholders to see the fund’s position,” Vanguard said late Thursday in a press release.
“As of June 28, the fund will have fully moved from the transition index to the FTSE Emerging Index,” Vanguard said.
VWO’s former benchmark, the MSCI Emerging Markets Index, still underlies the $33 billion iShares MSCI Emerging Markets Index Fund (EEM).
In the overall changeover, Vanguard dropped MSCI indexes on a total of 22 funds. Six international funds, including VWO, got FTSE indexes, while 16 U.S.-focused portfolios got benchmarks from University of Chicago’s Center for Research in Security Prices (CRSP)—a leading provider of research-quality, historical market data and returns.
All the transitions began in January of this year, and involved mutual fund versions and ETF versions of the same portfolio. As an example, the mutual fund the Vanguard Emerging Markets Stock Index Fund has $70 billion in assets under management. VWO—and each of Vanguard’s ETFs—is organized as a separate share class of its related mutual fund.
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