Vanguard Shakes Up Index Business

Vanguard, the world’s biggest mutual fund company, has decided to move away from some MSCI indices over the next several months in favour of benchmarks created by FTSE. The firm said its move was motivated by lower index licensing costs and will involve the US$67 billion Vanguard MSCI Emerging Markets ETF (NYSEArca: VWO), the world’s largest tracker of developing market stocks.

Vanguard’s announcement sent MSCI shares down 27 percent in New York trading on Tuesday.

Vanguard’s switch affects six international equity funds that had total assets of US$170 billion as of August 31, FTSE said today in a press release, noting the transaction was the largest ever international index-provider switch. The switch leaves iShares, the world’s biggest ETF firm, as the ETF provider with the deepest ties to MSCI.

The six funds will change to benchmarks in the FTSE Global Equity Index Series, replacing MSCI, and VWO and the index mutual fund of which it is part will be based on the FTSE Emerging Index, FTSE said. One major difference between the two index benchmarks is the absence of South Korea from the FTSE index, while the MSCI index weights the country at around 15 percent.

“This was a situation where we could line up some cost savings down the road for investors and still have a great benchmark provider,” Vanguard spokeswoman Linda Wolohan said today in an interview.

In its own press release, Vanguard said that in addition to the six international benchmarks moving to FTSE indices, it also plans to switch indices on 16 US stock and balanced index funds to benchmarks developed by the University of Chicago’s Center for Research in Security Prices (CRSP)—a provider of historical market data. The existing indices on these US-focused funds are also provided by MSCI.

Vanguard Chief Investment Officer Gus Sauter estimated that cost savings to investors would likely climb to the “millions” of dollars, given the US$350 billion total amount that’s benchmarked to the 22 funds affected by the switch.

“The transition from the funds’ current benchmarks, which are maintained by MSCI, is expected to be completed over a number of months and will be staggered,” Vanguard said in its prepared statement.

Sauter noted that the transition wouldn’t begin for several months and wouldn’t be completed until well into 2013.

The Vanguard-FTSE agreement substantially expands a pre-existing relationship between the two companies. Vanguard currently uses FTSE benchmarks on more than 20 index portfolios around the world, with total assets of US$26 billion.

One executive at a European exchange-traded fund provider, who preferred to remain anonymous, commented: “Given the size of VWO, even a 1 basis point cut in annual index licensing fees represents US$7 million in savings for the fund and its investors, and the cut may well have been more than that in practice. It’s also good to see increasing competition between index providers, who have often behaved as an oligopoly when licensing their indices.”

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