Reversal Of Fortune In EEM-VWO Asset War

November 15, 2012


Either way, since the announcement, Vanguard’s VWO has yet to have a single day of significant inflows, whereas iShares’ EEM has seen eight days of noteworthy asset gathering, for an aggregate asset inflow of over $2 billion.

As my colleague and IndexUniverse Director of Research Dave Nadig noted, institutional investors may prefer funds that track MSCI indexes because of MSCI’s clean and transparent rules and long performance records.

The MSCI indexes also dovetail nicely into one another and have a presence on almost every major data service and analytical platform.

Aware that tracking error could cost them their jobs, institutional money managers may be hesitant to invest in a fund that tracks an index other than the one their performance is benchmarked against. Most often, that’s an MSCI index.

Lingering Uncertainty

The other element that could be driving assets toward EEM is the relative certainty that it offers in comparison to VWO.

Not only do investment managers sticking with Vanguard risk introducing tracking error relative to an MSCI index they are benchmarking against, they are grappling with additional uncertainty surrounding the change.

Vanguard also changed indexes on a total of 16 domestic funds to benchmarks created by the University of Chicago’s Center for Research in Security Prices (CRSP), and much of the data on the CRSP indexes are still unavailable.

Additionally, VWO will have a “transitional” index next year as it seeks to unwind a South Korea position of 15 percent of the $55 billion fund over a period of five months. The aim is to minimize how much the transition upsets investment markets, but Vanguard hasn’t been too specific about how it will all work out.

Could recent asset flows suggest this uncertainty may not sit well with money managers? It could be, and we’ll have to see if they continue, as Vanguard begins to implement its shift away from MSCI at the start of the year.

Time will tell how this plays out, and I’ll be watching it.

At the time this article was written, the author held no positions in the securities mentioned. Contact Spencer Bogart at [email protected].


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