Vanguard Changes Not Radical

October 08, 2012

Vanguard’s indexing announcement last week created quite a stir, but investors need to take a deep breath.


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 (NYSEArca: 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 (NYSEArca: 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 (NYSEArca: 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 (NYSEArca: VEU) has assets of $7.4 billion, while the Vanguard Total World Stock ETF (NYSEArca: VT) and the Vanguard FTSE All-World ex-US Small Cap ETF (NYSEArca: 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 (NYSEArca: 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.


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