CRSP, the research center that's part of the University of
Chicago's Booth School of Business, may soon become a well-known
brand in the world of investments thanks to Vanguard Group's
decision to begin using CRSP indexes on 16 U.S.-focused Vanguard
funds next year.
While any indexing-industry veteran knows the Center for
Research in Security Prices is as prestigious a name as you can
find, the deal with Vanguard announced this week marks the very
first time the group has actually marketed investable indexes, and
is the start to a new chapter in the group's history.
CRSP is a nonprofit group of 75 academics and researchers that
has been around since the mid-1960s generating data and benchmarks
that were used primarily in the rarified air of academia. But the
agreement with Vanguard will almost surely put CRSP on many
investors' radar screens for the first time.
Among the funds that CRSP will now provide indexes for is the
$23.5 billion Vanguard Total Stock Market ETF (NYSEArca:VTI)-an
index-investing purist's security that canvasses just about the
entire U.S. stock market, and will cover a bit more of it once the
transition to the CRSP US Total Market Index takes place.
"When indexing and ETFs became so popular, I think they looked
at that and said, 'We have the premier database here, so we could
probably create some indexes and generate some profit for CRSP,'"
Rick Ferri, founder of Troy, Mich.-based Portfolio Solutions and a
well-known indexer said in an interview with IndexUniverse.
An introduction among friends years ago led to a collaboration
with Vanguard that resulted in CRSP's complete overhaul of its
index product line, and of course the partnership on the 16 indexes
that shook up the world of indexing this week, CRSP Chief Operating
Officer David Barclay told IndexUniverse this week.
"This has been a long-term process," Barclay said in the
interview, echoing the thrust of what Vanguard Chief Investment
Officer Gus Sauter told IndexUniverse; namely, that Vanguard's
decision to shift indexes on some of its funds has been in the
works for quite some time.
Vanguard also decided to change indexes on six international
funds to benchmarks provided by FTSE. When all the transitions are
finished on the 22 funds, Vanguard is likely to save "millions" in
licensing costs, according to Sauter.
On the losing end of both the FTSE and the CRSP deals is MSCI,
which said the loss will cut $24 million of operating income from
around $900 million in annual revenues.
Vanguard Stresses Cost Savings
Vanguard officials have gone to great lengths emphasizing that
lower indexing licensing fees led it to decide to make the
transitions to the both the FTSE and CRSP indexes.
They've downplayed any differences in returns between the
indexes, stressing instead that costs can be controlled and that it
intends to pass on whatever savings it realizes on the changes to
No one seems willing to talk about the exact terms of the two
indexing deals, so it's not clear how much less than the $24
million it was forking over to MSCI that Vanguard will be paying
FTSE and CRSP when all the transitions are complete sometime in
"This is a great day for investors," Rodney Comegys, an
executive in Vanguard's Equity Investment group, said in a phone
interview, epitomizing the gist of comments officials at the Valley
Forge, Pa.-based firm have made to explain the index
Comegys emphasized that in the "pure-beta" pocket of index
investing that Vanguard travels in, the differences from one broad
index to another are likely to be minimal, and that investors are
likely to respond more to low costs or the Vanguard brand name than
the name of, say, an indexing firm.
Real Index Differences
While that may be the way investors and even advisors shop
around for a fund these days, that doesn't mean it's the right way
to go about it, CRSP's Barclay said.
"Cost is exceedingly important right now to investors, because
returns in general are very low," Barclay offered. "But cost is
certainly not the only aspect that matters."
"You have to look at the underlying index very carefully," he
said of investors choosing a fund. "It's often overlooked-a lot of
people decide on an ETF based on a provider alone-but it's
important for investors to understand what a fund is investing
One important methodology difference Barclay isolated is an
asset-migration methodology CRSP calls "packeting" that's designed
to minimize trading costs to investors. The term is used to
describe a slow transition of assets in terms of exposure between
market capitalization segments.
For example, when a company moves from a midcap to a large-cap
category, a CRSP index shifts only 50 percent of the allocation to
that company into the next market-capitalization bracket and waits
another quarter before shifting the remaining 50 percent.
The dual-step process is to prevent "surfing across the border,"
as Barclay put it, by giving the company some time to solidify its
stance in its new bracket. That lack of "surfing" means cheaper
trading costs at the end of the day, he said.
"I like to compare this to a car's shock absorbers," Barclay
said. "It keeps you from bouncing around unnecessarily."
VTI:A Total Market Fund Again
Another difference that's worth noting is that under the planned
index changes, VTI will pick up another 0.5 percent of the U.S.
investment universe total capitalization in the form of additional
micro-cap holdings, Portfolio Solutions' Ferri said.
"With CRSP, VTI is now going to be tracking a total market
index," he said, noting that in a period of outperformance for
micro caps, VTI will again capture that move more completely than
it has with the MSCI Broad Market Index as its benchmark.
More broadly, he said that while CRSP is new to the world of
indexing, it's as ready for its close-up as any firm could be.
"These CRSP indexes have had more time testing than the MSCI
indexes when Vanguard adopted them," Ferri said.
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