Vanguard to change target benchmarks for 22 funds

Vanguard is to abandon MSCI on 22 index funds in favour of FTSE and Chicago Booth’s Center for Research in Security Prices (CRSP).

Vanguard is to change the target benchmarks of 22 index funds, including their exchange-traded fund (ETF) share classes.

The change will include six international stock funds, which will transition to FTSE benchmarks, and 16 US stock and balanced funds, which will transition to new benchmarks developed by the University of Chicago’s Center for Research in Security Prices (CRSP).

The 22 impacted funds account for $537 billion in assets under management (AUM), of which $131 billion is invested in ETF share classes. All are currently benchmarked to MSCI indices.

“The indexes from FTSE and CRSP are well constructed, offer comprehensive coverage of their respective markets, and meet Vanguard’s ‘best practice’ standards for market benchmarks,” said Vanguard Chief Investment Officer Gus Sauter.

Mr Sauter added: “Equally important, and with our clients’ best interests in mind, we negotiated licensing agreements for these benchmarks that we expect will enable us to deliver significant value to our index fund and ETF shareholders and lower expense ratios over time.”

FTSE Group leaps up ETF rankings

This move is the largest international index benchmark switch ever and represents a big win for both FTSE Group and relative newcomer, CRSP. It is a major blow for MSCI Inc which, until now, had enjoyed a strong 2012 with a total of 57 new ETFs linked to MSCI indices launched.

The six international index funds affected, which will be transitioning to FTSE indices, have aggregate assets of $170 billion. This includes the world’s largest emerging market fund, the $67bn Vanguard Emerging Markets Stock Index Fund, and its ETF, the Vanguard MSCI Emerging Markets ETF (VWO), which is also the world’s second-largest ETF by AUM.

This fund will move from the MSCI Emerging Markets Index to the FTSE Emerging Index. While the two indices are generally comparable, the FTSE Emerging Index classifies South Korea as a developed market.

With the switch to the new benchmarks, FTSE will become the third-largest equity ETF index benchmark provider globally. Mark Makepeace, chief executive of FTSE, said: “[the] agreement with Vanguard represents another significant step forward in building our presence in North America and in making FTSE a household name in the marketplace.”

CRSP instantly becomes major player in ETF industry

While FTSE is an established index provider and a long-standing competitor of MSCI, CRSP is less well known.

The CRSP is a research centre of the University of Chicago Booth School of Business and is credited with pioneering the development of US stock market data in 1960 that are widely used in academic and investment research. In 2009, the centre engaged with Vanguard to create a new series of investable indices, branded CRSP Indexes. Vanguard will be the first investment management firm to track CRSP’s broadly-diversified benchmarks that cover the broad US market, market-capitalisation segments, and styles.

CRSP’s capitalisation-weighted methodology introduces the unique concept of “packeting,” which cushions the movement of stocks between adjacent indices and allows holdings to be shared between two indices of the same family. This approach maximises style purity while minimising index turnover.

“CRSP is highly regarded and experienced in the creation of market databases, and its innovative packeting methodology is expected to minimise transaction costs during periodic index rebalancing,” said Mr Sauter.

Sixteen stock and balanced index funds, with aggregate assets of $367 billion, will track CRSP benchmarks, including Vanguard’s largest index fund, the $197 billion Vanguard Total Stock Market Index Fund. The fund and its ETF, the Vanguard Total Stock Market ETF (VTI), will transition from the MSCI US Broad Market Index to the CRSP US Total Market Index.

David Barclay, CRSP’s Chief Operating Officer, said: “For more than 50 years, CRSP has been providing research-quality market and index data. The new CRSP Indexes are a logical extension of our core products – they provide data for the development of new research products, central to our scholarly heritage, and they also strategically position CRSP for the future as an index provider.”

Sunil Kumar, Chicago Booth Dean, added: “Chicago Booth continues to have an extraordinary impact on business research and education worldwide. The CRSP Indexes reflect the unique and very interesting work that is done by Booth’s research centers to advance the body of knowledge in business and finance.”

Major loss for MSCI

Shares in MSCI Inc, which is listed on the NYSE, fell 27% on the news, wiping over $1 billion off the company’s market value. The annualised revenue loss associated with the Vanguard funds being transitioned is understood to be approximately $24 million.

Baer Pettit, Head of MSCI’s Index Business, said: “We are disappointed that Vanguard will no longer use our indices as the basis for these exchange-traded funds. The ETF market in North America is competitive and as it evolves, we will work with those ETF providers who seek to utilise independent, well-respected, and high-quality equity indices in their products.”

The transition will be staggered over a number of months, commencing in January 2013. The changes will encompass all share classes of the 22 funds, including ETFs, and are not expected to result in capital gains distributions to the funds’ shareholders.