Vanguard, the world’s biggest mutual fund company, began the well-publicized index change of its huge $60 billion emerging markets ETF with a name change that will reflect the fund’s new FTSE benchmark.
Effective today, the fund will have the name Vanguard FTSE Emerging Markets Index ETF (NYSEArca: VWO), abandoning the name Vanguard MSCI Emerging Markets Index ETF it has carried since its March 2004 launch. The fund will keep its ticker “VWO,” Vanguard said today in a press release.
Crucially, the name change doesn’t mean the index transition is finished. The company has said, and today reaffirmed, that VWO fund will follow a transitional index to better manage the ETF’s changing holdings, notably its weighting to South Korea.
Vanguard initially announced the transitioning of VWO and 21 other funds away from MSCI indexes on Oct. 2, 2012, framing the initiative as a way to lower its clients’ investment costs over the longer term. It reaffirmed that motivation in today's press release. A company spokeswoman also said Vanguard had no news on the other index transitions at this time, but that that would be forthcoming in due course.
So, for now, it’s all about VWO, and the movement to the transitional index that is being used to manage the elimination of the fund’s allocation to South Korea.
“In order to provide transparency to unitholders during the transition, the Emerging Markets Index ETF will follow a transition index, the FTSE Emerging Transition Index, for approximately six months,” Vanguard said.
“This extended transition period will reduce the costs associated with trading large amounts of securities in a short period. During the transition period, FTSE will provide a range of freely available index data with respect to the transition index on http://www.ftse.com/vanguard, including indicative constituents and weights.”
A total of six internationally focused funds—including VWO—will adopt FTSE indexes, while 16 other domestically focused portfolios will drop MSCI indexes and adopt benchmarks produced by CRSP, an indexing shop attached to the University of Chicago.
The Korea Question
At the center of the VWO transition is the question of allocation to South Korea—how that will be transitioned and how much of the Asian country investors want in their portfolios.
The MSCI Emerging Markets Index that VWO is abandoning has a 15 percent South Korea weighting, while the FTSE Emerging Index doesn’t have any at all, as FTSE doesn’t classify South Korea as an emerging market.
Investors in Vanguard funds after the index transitioning is complete will get their South Korea exposure via what is now called the Vanguard MSCI EAFE ETF (NYSEArca: VEA), a fund focused on the developed world outside of North America.
VEA currently has no South Korea allocation, as MSCI doesn’t yet classify South Korea as a developed market, and, when it shifts to a FTSE index sometime soon, it will have a South Korea weighting around 2 percent.
How much Korea exposure investors will hold after the index changes would depend on how much of an allocation to VEA they have but, at first blush, it appears that many investors are likely to have less South Korea exposure via the new VEA with a FTSE index than via the old VWO that used the MSCI index.
That prospect of being underweight Korea, plus the reluctance of institutional investors to move away—even on a single fund like VWO—from MSCI benchmarks, has fueled significant inflows into the iShares MSCI Emerging Markets Index Fund (NYSEArca: EEM).
The flows into EEM, which by and large are not coming from VWO, have made EEM a much more popular developed-markets ETF than VWO since Vanguard announced the index change in early October.
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