Vanguard To Drop MSCI Index On VWO

October 02, 2012

Vanguard, the world’s biggest mutual fund company, has decided to segue away from some MSCI indexes over the next several months in favor of benchmarks created by FTSE. The move was motivated in part by lower index licensing costs and will involve its $67 billion Vanguard MSCI Emerging Markets ETF (NYSEArca: VWO).

Vanguard’s switch affects six international equity funds that had total assets of $170 billion as of Aug. 31, FTSE said today in a press release, noting the transaction was the largest ever international index-provider switch. The switch leaves iShares, the world’s biggest ETF firm, as the ETF firm with the deepest ties to MSCI.

The six funds will change to benchmarks in the FTSE Global Equity Index Series, replacing MSCI, and VWO and the index mutual fund of which it is part will be based on the FTSE Emerging Index, FTSE said. One huge difference is the absence of South Korea from the FTSE index, while the MSCI index weights the country at around 15 percent.

“This was a situation where we could line up some cost savings down the road for investors and still have a great benchmark provider,” Vanguard spokeswoman Linda Wolohan said today in an interview. It’s tempting to view Vanguard’s move as a riposte to the Charles Schwab fee cuts the company did last month on its 15 ETFs, though Vanguard officials downplayed this.

In its own press release, Vanguard said that in addition to the six international benchmarks moving to FTSE indexes, it also plans to switch indexes on 16 U.S. stock and balanced index funds to benchmarks developed by the University of Chicago's Center for Research in Security Prices (CRSP)—a leading provider of research-quality, historical market data and returns. The existing indexes on these U.S.-focused funds are also provided by MSCI.

Vanguard Chief Investment Officer Gus Sauter estimated that cost savings to investors would likely climb to the “millions” of dollars, given the $537 billion total amount that’s benchmarked to the 22 funds affected by the switch. That's the $170 billion associated with the FTSE move and $367 billion linked to the CRSP indexes.

“The transition from the funds' current benchmarks, which are maintained by MSCI, is expected to be completed over a number of months and will be staggered,” Vanguard said in its prepared statement.

Sauter noted that the transition wouldn’t begin for several months and wouldn’t be completed until well into 2013.

MSCI, shedding additional light on the financial piece of the tale, said annual operating income it currently derives from the 22 funds in question totals about $24 million.

“The impact to reported financial results is expected to start in January 2013 as the funds are transitioned,” the company said Tuesday in a press release.

Again, MSCI said it believes the transition process will begin early next year.

On the other side of the fence, the Vanguard-FTSE agreement builds on a pre-existing relationship between Valley Forge, Pa.-based Vanguard and London-based FTSE. Vanguard currently uses FTSE benchmarks on more than 20 index portfolios around the world with total assets of $26 billion.

One executive at a European exchange-traded fund provider, who preferred to remain anonymous, commented: "Given the size of VWO, even a 1 basis point cut in annual index licensing fees represents $7 million in savings for the fund and its investors, and the cut may well have been more than that in practice. It's also good to see increasing competition between index providers, who have often behaved as an oligopoly when licensing their indices."

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