Get Divvy With It … Again

August 24, 2006

Emerging Markets Emerge

In other Vanguard news, the company has decided that the stock markets in Russia and Malaysia have matured enough to be included in their $9.6 billion Emerging Markets Stock Index Fund. 

Since inception in 1994, the Vanguard fund has tracked a custom-made MSCI benchmark called the Select Emerging Markets Index, which excluded certain countries due to concerns about liquidity, repatriation of capital and various barriers to entry.  One by one, however, those "excluded" markets have been upgrading and coming to meet Vanguard's standards. In 2003, Chile, Peru and India were admitted to the club. Now, Malaysia and Russia have made the grade.

With those additions, Vanguard says the Select Emerging Markets Index is now "effectively the same" as the standard MSCI Emerging Markets Index.  As a result, Vanguard is changing the fund's benchmark to the standard index.

This move will significantly raise the stakes in the huge market for ETF-based Emerging Markets exposure. For years, Barclays Global Investors has justified the higher fees on its Emerging Markets ETF - the iShares MSCI Emerging Markets Fund (NYSE: EEM) - by noting that its fund was more complete than Vanguard's.  In particular, it often called out the differences in exposure to Russia and Malaysia. 

Now, however, the two funds will be substantially identical. Vanguard charges just 30 basis points in expenses for its Emerging Markets ETF (AMEX: VWO), while iShares charges a whopping 0.75 percent.  Currently, the iShares fund has ten times the assets of the Vanguard fund - $12 billion vs. 1.2 billion - but the new fee levels could put pressure on that ratio, or at the very least, put pressure on BGI to lower its fees.

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