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Vanguard Changes Not Radical

Ana Kostioukova


Fund index changes occur fairly frequently, but few care enough to notice since it happens to smaller, less popular funds.

But Vanguard’s recent index shuffle hit closer to home for many investors if for no other reason than that Vanguard is Vanguard, and total assets of $537 billion are in question.

Still, while the assets are grand in scale, they aren't likely to change your portfolio exposure in a big way.

As Dave Nadig pointed out, we may see some differences in performance :the MSCI Broad Market Index, the benchmark the Vanguard Total Stock Market ETF (VTI) currently tracks, outperformed its soon-to-be benchmark (CRSP Total Market Index) by 0.47 percentage points in the last year.

Fair enough—it’s an index change after all. However, Vanguard’s new indexes aren’t radically different from the old ones and, in the long run, we may not see a whole lot of performance variance between the two groups.

That said, a big constituent change that will occur when the Vanguard MSCI Emerging Markets ETF (VWO) switches indexes is that the new benchmark won’t include South Korea. But, as my colleague Paul Baiocchi pointed out in a blog earlier this year, returns on different broad developing market ETFs aren’t so different, with or without Korea .

Granted this is a noteworthy change, but when you consider that the WisdomTree Europe Hedged Equity Fund (HEDJ) pretty much became a new ETF when WisdomTree abandoned the fund’s previous international focus, VWO’s makeover looks quite tame.

A Closer Look At Index Changes

In the overall changes, six of Vanguard’s international ETFs are changing to FTSE benchmarks. However, ETF investors aren’t new to this index provider, and neither is Vanguard.

After all, three of its nine international equity funds track FTSE indexes and are quite popular.

The Vanguard FTSE All-World ex-US ETF (VEU) has assets of $7.4 billion, while the Vanguard Total World Stock ETF (VT) and the Vanguard FTSE All-World ex-US Small Cap ETF (VSS) each has over $1 billion in assets.

Perhaps investors are more curious about the 16 Vanguard U.S. equity ETFs that are switching to benchmarks created by the University of Chicago’s Center for Research in Security Prices, or CRSP, pronounced “crisp.”

It’s too early to say if these changes will lead to long-term differences in returns, as we just don’t have enough data. But putting quirks in CRSP’s methodology into perspective may put some minds at ease.

Percentage Buckets

Instead of a set number of companies chosen by market cap, CRSP selection will be based on a total percentage basis.

For example, the Vanguard Large-Cap ETF (VV), which is currently organized by MSCI around the 750 biggest firms by market cap, will now comprise 85 percent of the U.S. market-cap universe.

We use this approach at IndexUniverse for our Analytics product. We use the MSCI USA Investable Markets Index as our U.S. equity total market benchmark, which, unlike the MSCI US Broad Market Index, uses percentage buckets instead of a number cutoff, making it more representative of the market.

The number of large-cap firms existing in the market isn’t static, and may or may not stay at 750 in the future, whereas using a percentage will ensure the largest companies in the market are ever-present.



Front-Running Protection

CRSP index constituents are re-ranked quarterly by market cap, which is calculated by shares outstanding for each stock on the ranking day times the price for that security on a randomly selected day within the seven previous trading days, excluding the largest price fluctuations.

Vanguard probably does this to avoid front-running, which benefits Vanguard and ultimately the investor.

That said, it makes the holdings in its funds even less transparent. Many already argue Vanguard isn’t transparent enough, as it publishes holdings of its ETFs quarterly with a 30-day lag, instead of daily, as is customary for most of its competitors in the ETF industry.

Value And Growth Metrics

There is a lot of variety as is, and CRSP doesn’t introduce anything extraordinary to the broad range of growth and value metrics that exist between index providers. It shares many of the same metrics as MSCI in both growth and value screeners. The largest difference is the introduction of two additional growth screeners:current investment-to-assets ratio and return-on-assets.

The current investment-to-assets ratio is essentially a liquidity measure, or how well a company manages cash and other liquid assets.

Return on assets is expressed as net income over total assets, and is a measure of how efficient a company is at using its assets to generate earnings.


CRSP allows a firm’s total market cap to be split across two market-cap buckets.

This occurs when a firm’s market cap rank moves completely through a market-cap buffer band. If a company crosses beyond a band, 50 percent of its market cap—a so-called packet—is allocated to the new cap bucket.

If the firm remains in its new ranking in the following quarter, the remaining half of its market cap is reallocated to the new cap bucket. But if the firm retreats back inside the band, the second packet isn’t moved and the allocation remains 50-50. This keeps the fund representative and keeps constituents from moving back and forth between buckets.

Again, to see if these changes really create different returns won’t be possible until we have enough data.

At first blush, however, none of these is radically different from existing indexes.

Yes, it’s a large index change, and it’s easy to get excited. But let’s not be mean to the new index kids on the block just because they’re new.


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