Vanguard Changes Tricky For Investors

October 02, 2012

Vanguard dropped a bomb this week on the world of indexing, and it’ll take time for the smoke to clear.

It’s really not a huge surprise that Vanguard decided to switch indexes for 22 of its funds. After all, the company is no stranger to shaking things up.

It shook up indexing back in the day, it shook up the industry with low-cost 401(k)s and it's no stranger to shifting alliances. Recall that until 2010, Vanguard didn’t have an S&P 500 ETF because of a long-standing licensing dispute with Standard & Poor’s.

But shifting away from MSCI benchmarks marks the end of an era for Vanguard, and while you can expect in-depth analysis of what this means for investors on a fund-by-fund basis, I thought I’d highlight a few arguments on whether this is a good or bad thing from our internal discussions.

Most Retail Investors Won’t Care, But They Probably Should

Vanguard has the strongest brand in the ETF space in terms of customer loyalty. That brand loyalty is well deserved—Vanguard remains one of the lowest-cost providers of any investment manager, and has a squeaky-clean reputation that lets advisors and investors sleep well at night.

Most investors in flagship Vanguard funds like the Vanguard MSCI Emerging Market Fund (NYSEArca: VWO) or its Vanguard Total Stock Market ETF (NYSEArca: VTI) probably won't bat an eyelash at today’s news.

From Vanguard’s perspective, this is just as it should be. In its press releases today, the company assured investors that the new indexes are good indexes, and that they’ll be cheaper, which will allow Vanguard to continue lowering fees.

But not all indexes are created equal. Each one of these index swaps has its own implications. Take VWO: Since 2003, when the current FTSE version of the emerging markets index was born, the FTSE index is up 193%.  The MSCI index that VWO tracks is up "only" 180%. To suggest that investors won't notice a 13% difference in returns seems naive.  Of course, there's no predictive value here.  Over the next 10 years, the numbers could reverse, based solely on the inclusion of South Korea in the MSCI indexes.  But the point is -- it matters.

Even in the more “boring” case of VTI, there are real differences.

While many of the CRSP indexes Vanguard has helped build for their U.S. equity exposure are too new for a long comparison, just in the last year, the MSCI Broad Market index VTI currently tracks is 0.47 percentage points ahead of the CRSP Total Market Index. Is a half-percentage point enough for investors to notice? For the type of investor drawn to Vanguard, I'd say yes.

Most Institutions Will Definitely Care, And They Definitely Should

Large institutions will struggle to understand these new indexes well enough to be comfortable with them. MSCI is getting booted, we suspect, largely due to cost. MSCI charges a premium price in the index world. But it charges that premium price because, honestly, it can.

MSCI’s indexes -- particularly the international indexes -- have numerous salutary benefits if you’re a hard-core index wonk running lots of models. Its indexes follow clean, transparent rules. They tend to dovetail into each other nicely with minimal overlap. They’ve got long tenures, and a presence on almost every major data service and analytical platform.



Want to learn more about smart-beta ETFs? Check out our smart-beta guide, essentials library and ETF screener!


International equity funds like 'IEMG' led inflows on Monday, May 18, as rising markets lifted U.S.-listed ETF assets to a record $2.174 trillion.

'SPY' and 'GLD' paced SSgA's issuer-leading outflows on Monday, May 18, as rising markets lifted total U.S.-listed ETF assets to a record $2.174 trillion.


By Olly Ludwig

Yields will one day head higher, so is it time to get bond exposure outside the U.S.?

By Rachael Revesz

Stop dancing around the subject, call women ‘women’ and let’s be a more visible part of this industry.

By Olly Ludwig

It’s no secret that hedge funds love ETFs, but what’s less appreciated is that their love of ETFs will likely spell their demise.

By Olly Ludwig

Yes, bond yields are ticking higher these days, but it’s important to keep the whole yield-curve picture in mind.


By Nasdaq Global Indexes

Bond exposure or bond performance? Only defined maturity indexes provide the latter.

By Invesco PowerShares

Invesco PowerShares and Market Strategies International’s second annual survey provides vital insights about smart beta and ETFs overall.

By Invesco PowerShares

Investors are implementing smart-beta exchange-traded funds (ETFs) in their portfolios in a variety of ways and for different reasons.