Vanguard SC Int'l Opens Amid Changing Landscape

March 19, 2009

New Vanguard small-cap international fund, with an ETF share class, opens for investment on Thursday.

The much-anticipated Vanguard small-cap international fund opened for investment on Thursday. Its exchange-traded fund sister share class will launch after a two-week subscription period, according to the company.

The Vanguard FTSE All-World ex-US Small-Cap Index Fund (VFSVX) will wait until around the first week of April to actually start deploying its portfolio. In the meantime, it will gather assets and invest in money market funds as well as other short-term, liquid investments.  The Vanguard FTSE All-World ex-US Small-Cap ETF (NYSE: VSS) won't launch until the so-called "subscription period" ends, meaning somewhere around April 2. 

Whenever they actually start trading, VSS and VFSVX will fill a big hole in the indexing pioneer's lineup. It's a gap that many asset-allocation-minded investors have been requesting be filled for years. (See related stories here and here.)

The funds are the first small-cap index funds to combine developed and emerging markets exposure.

VSS will charge just 0.38% in annual expenses, making it the lowest cost small-cap emerging markets fund on the market.  VFSVX will charge 0.60%.

Will They Succeed?

It will be interesting to see how much in the way of assets the funds attract right away. Although signs of thawing market conditions are on the horizon, both will be launching in a bear market. That might make VSS's debut, in particular, a bit dicey.  

Through February, the main competitors to the new Vanguard funds -- at least in the ETF share class -- have produced mnixed cash flows:

  • The first of its kind in the ETF marketplace, the WisdomTree International Small Cap Dividend ETF (NYSE: DLS), had $7 million in net inflows for the year. It has $236 million in assets. 
  • The iShares EAFE Small-Cap Index (NYSE: SCZ) had flat net inflows, with net assets of $201 million.
  • The SPDR International Small Cap ETF (NYSE: GWX) was down slightly in flows, with net outlfows  of $37 million year-to-date. It had assets of $254 million.

Vanguard's ETF will be cheaper than these competitors, and will include emerging markets exposure; it will be interesting to see how it is recevied.

It's worth noting that Vanguard's actively managed  small-cap stock international fund field has also seen assets slump. At the end of February, the Vanguard International Explorer Fund (VINEX), had assets of $867.7 million. Late in 2008, when it opened to new investments again for the first time in years, the  fund had more than $1 billion in assets. That decline, however, is likely due to makret performance and not to actual flows.

The reopening of VINEX created an odd event in the fund world -- an actively managed mutual fund was temproarily the least expensive fund in its asset class. At the time, VINEX was charging an expense ratio of 0.35%. The closest competitor was SCZ at 0.40%. But that has changed. With the loss of assets this year, VINEX's expense ratio has gone up as well: It's now listed at 0.42%. 

VSS, with an expense ratio of 0.38%, will take over the mantle of cheapest fund. Institutional shares -- which could become available to 401(k) plans and advisers making large block purchases -- will come with an expense ratio of 0.35%.


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