Vanguard To Drop MSCI Index On VWO

October 02, 2012

iShares Alone

Vanguard’s move away from MSCI leaves San Francisco-based iShares with some of the deepest ties to MSCI in the ETF industry. And it looks like it wants to deepen them.

If nothing else, a new benchmark for VWO puts an end to a long-standing rivalry between Vanguard’s fund and the $37 billion iShares MSCI Emerging Markets Index Fund (NYSEArca: EEM), both of which have been linked to the same MSCI index.

EEM, the older of the two ETFs, was also the largest until 2011, when VWO managed to get the upper hand in terms of assets under management thanks to a cheaper price tag and a better record tracking its index.

Still, iShares may be seeing this index switch as an opportunity to regain some momentum.

“MSCI is the gold standard of global and international equity indexes—the near universal choice of professional investors,” Mark Wiedman, global head of iShares said in a prepared statement. “We plan to deepen our partnership with MSCI to help deliver the highest quality products and portfolio construction to our clients.”

IndexUniverse Director of Research Dave Nadig said he sees potential for iShares, particularly as it relates to institutional investors.

"This could be seen as a small salvo from Vanguard in the price war, as this likely lets them keep fees extremely low, or possibly even lower them more in the future,” Nadig said.

“However, iShares now becomes the only game in town for any investor or institution with either an MSCI mandate or an MSCI benchmark," he added.


Apart from how all this affects MSCI and iShares EEM, it’s pretty clear that FTSE is coming out a big winner.

Sure it had to serve up a less expensive package than MSCI did, but it radically expanded its footprint in the $1.3 trillion U.S. ETF market.

Until today announcement, FTSE was the index provider for only four broad size and style funds outside of Vanguard. Those funds and their assets are:

  • iShares FTSE Developed Small Cap ex-North America (NYSEArca: IFSM), $27.4 million
  • Schwab FTSE International Equity ETF (NYSEArca: SCHF), $839.8 million
  • Schwab FTSE Developed Small Cap Equity ETF (NYSEArca: SCHC), $167.8 million
  • Schwab FTSE All Emerging Market Equity ETF (NYSEArca: SCHE), $547.2 million

The fact that VWO will soon be sharing indexes with Schwab’s SCHE puts in sharp focus the idea of what Nadig and others in the ETF industry are calling a “price war” between the two low-cost providers.

Sauter dismissed the idea that Vanguard’s announcement was in any way meant to be a response to Schwab’s price cuts last month that left the San Francisco-based company’s ETFs with the lowest expense ratios in the U.S., and said the timing was purely coincidental.

“Actually, [Schwab] wasn’t in the consideration, honestly,” Sauter said. “What we were trying to do, as we always do, is try to find value for our clients. And we found a way to add additional value.”

As things stand, SCHE is the cheaper of the two developing-market funds, with an annual expense ratio of 0.15 percent, or 15 basis points, compared with 20 basis points for VWO.

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