On Tuesday, Vanguard rocked the exchange-traded products world
by announcing it would drop MSCI (NYSE:
MSCI
) indexes on 22 of its funds. Pennsylvania-based Vanguard, the
firm that pioneered index funds and today is the third-largest
U.S. ETF sponsor, said the moves "should save millions of dollars
in licensing expenses for the funds-savings that will ultimately
benefit shareholders,"
according to a statement issued by the firm
.
Of the 22 Vanguard funds that will start tracking new indexes,
six are international funds, including the now soon-to-be former
Vanguard MSCI Emerging Markets ETF (NYSE:
VWO
). With $67 billion in assets under management, VWO is the
third-largest U.S.-listed ETF and the largest emerging markets
ETF.
VWO will start tracking
the FTSE Emerging Markets Index, which is
sponsored by U.K.-based FTSE Group
. Other marquee Vanguard ETFs ditching MSCI in favor of FTSE
indexes, include the Vanguard MSCI Europe ETF (NYSE:
VGK
) and the Vanguard MSCI Pacific ETF (NYSE:
VPL
).
There is perhaps no other way of describing this news than as
bad for MSCI, which was spun off from Morgan Stanley (NYSE:
MS
) in 2007. The investment bank would sell the remainder of its
stake in 2009. On Tuesday, shares of MSCI plunged almost 27
percent on volume that was nearly 26 times the daily average. It
was the largest single day decline for the stock on record,
according to Bloomberg
.
Not Always This Way
Without confirmation to this effect, there is no reason to
believe there was a rift between Vanguard and MSCI leading up to
the announcement. In fact, Vanguard was once an ardent supporter
of MSCI. On a page that was still up
on the Vanguard web site
as of early Wednesday, the fund issuer said the following: "In
recent years, most of Vanguard's index funds and Vanguard ETFs
have switched to new benchmarks from Morgan Stanley Capital
International, because MSCI incorporated many of the criteria
that Vanguard believes to be the cutting edge in constructing
better indexes."
On that page, Vanguard goes on to outline six advantages of
MSCI indexes, including float adjustment, market coverage, market
cap levels and rebalancing schedule. Vanguard even said "there
can be better ways to slice the pie" while going on to note "For
index funds, the MSCI benchmarks potentially provide several
incremental advantages on a net basis. As the table above
illustrates, these benefits include lower portfolio transaction
costs and potentially lower taxes, allowing your clients to
capture more of the return of the target market.
"More important, MSCI indexes are a better reflection of their
target markets. By tracking these indexes, Vanguard's index funds
and Vanguard ETFs are better tools for implementing your asset
allocation strategies."
What Happened?
Vanguard's reason for shifting away from MSCI indexes,
cost-cutting, is plausible. The Vanguard brand, in large part, is
built around the fact that investors view the company as the
purveyor of some of the lowest-cost ETFs and mutual funds on the
market.
All that is to say unless Vanguard publicly discloses another
reason for parting ways with MSCI, the cost issue will have
suffice as the explanation. What is clear is that the change is
not just big news, it is big. Period. It is the largest ever
international index switch, according to FTSE.
"Today's agreement with Vanguard underlines FTSE's continuing
growth as a global brand," said Mark Makepeace, Chief Executive
of the FTSE Group, in a statement. "With the switch, FTSE will
become the third-largest equity exchange traded product index
benchmark provider globally, with more than $124 billion in ETF
assets benchmarked to FTSE indices."
BlackRock (NYSE:
BLK
), parent company of iShares, the world's largest ETF sponsor, is
not looking to fan the flames of
its rivalry with Vanguard
, but the firm is standing behind MSCI.
"MSCI is the gold standard of global and international equity
indexes - the near-universal choice of professional investors. We
plan to deepen our partnership with MSCI to help deliver the
highest quality products and portfolio construction to our
clients," said Mark Wiedman, global head of iShares, in an email
to members of the media sent on Tuesday.
South Korea
The role South Korea's status as an emerging market played in
Vanguard's decision to move to the FTSE Emerging Markets Index is
a point of speculation. South Korea's emerging markets status
has been hotly contested
.
The country is an OECD member and FTSE, the International
Monetary Fund and the World Bank all view the country as
developed. The iShares Emerging Markets Dividend Index Fund
(NYSE:
DVYE
), which tracks a Dow Jones index, devotes a scant percentage of
its weight, 3.99 percent, to South Korea. That puts the country
behind Malaysia, Czech Republic and Indonesia, to name a few, in
that ETF.
Still, MSCI continues to classify South Korea as emerging.
That is not a knock on MSCI. It is just statement of fact. FTSE
classifies the following nations as advanced developing
economies: Brazil, Czech Republic, Hungary, Malaysia, Mexico,
Poland, South Africa, Taiwan and Turkey. The following are
classified as secondary emerging nations: Chile, China, Colombia,
Egypt, India, Indonesia, Morocco, Pakistan, Peru, the
Philippines, Russia, Thailand and the United Arab Emirates
The bottom line is this: Twenty-two Vanguard funds will no
longer use MSCI indexes and the announcement runs counter to the
kind words the fund sponsor once had for the index provider.
For more on ETF indexes, click
here
.
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