A month and a half after Vanguard shocked the indexing world by dropping MSCI as the benchmark provider for more than $500 billion worth of its funds, the dust is still settling.
It seems clear the change will truly reduce costs for Vanguard’s largely buy-and-hold investor base, but it could hurt Vanguard too, as institutional investors choose to stick with competing MSCI-tracking funds, notably from iShares.
Some asset flows along these lines caught my eye in the past week. The Vanguard MSCI Emerging Markets ETF (NYSEArca: VWO), which will no longer have the same index as the iShares MSCI Emerging Markets Index Fund (NYSEArca: EEM) sometime next year, suffered redemptions of more than $700 million, while EEM pulled in $850 million over the same period.
This reverses a trend of asset flows over the past few years that definitely favored VWO. There were early signs something might have been up late last month, as my colleague Carolyn Hill pointed out incipient signs of change; namely, that EEM was picking up fresh assets while VWO wasn’t.
Interestingly, the flow between the two powerhouse emerging markets funds is from the lower-expense-ratio VWO to the higher-expense-ratio EEM. That’s important, because VWO’s 20-basis-points-a-year price tag was one of its main attractions when compared with EEM’s cost of 67 basis points.
While that comparison was particularly salient when the funds shared indexes, there may now be more at play here than just expense ratios and MSCI vs. non-MSCI indexes. For one, EEM isn’t making any changes, and it’s known to be one of the more liquid ETFs, which may trump Vanguard’s low-fee advantage.
To put this tale of two worlds in perspective, over the past week, EEM accumulated more assets than any other ETF, whereas VWO had the second-largest asset outflow of any ETF.
As I said, this is a striking reversal. From the start of the year to the date of Vanguard’s index-change announcement, 88 percent of the $13 billion-plus of inflows into the two funds went to VWO.
Of course, we can’t be certain that EEM’s inflows are a direct result of VWO’s outflows, but they’re definitely conspicuous. We could be witnessing a slow flow of MSCI-seeking assets from VWO to EEM in a zero-sum game, or we could be witnessing money that was previously sidelined going to work for EEM.
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