Not All Asset Managers Are Enthused By Vanguard Index Changes
Summary Vanguard is making changes to its emerging market ETF as the FTSE makes index changes. China A-shares will have a greater role in the FTSE Emerging Market Index. Potential risks in changing up the current make-up of the widely observed index. By Todd Shriber & Tom Lydon Last month, Vanguard, the second-largest U.S. issuer of exchange traded funds, said it is making changes to four of its popular international ETFs, including the Vanguard FTSE Emerging Markets ETF (NYSEARCA: VWO ) . VWO is the largest emerging markets ETF by assets. Pennsylvania-based Vanguard said VWO will transition to the FTSE Emerging Markets All-Cap China Inclusion Index from the FTSE Emerging Index, meaning the ETF will eventually hold Chinese A-shares, becoming the second diversified emerging markets ETF to do so. The Vanguard FTSE Developed Markets ETF (NYSEARCA: VEA ) , the Vanguard FTSE Europe ETF (NYSEARCA: VGK ) and the Vanguard FTSE Pacific ETF (NYSEARCA: VPL ) , funds with nearly $80 billion in combined assets under management, are also undergoing index changes , including significantly increased exposure to small caps. Not all money managers are fussed on those index changes. In a blog post posted dated July 17 , New Frontier, a Boston-based institutional research and investment advisory firm, said it is dropping the aforementioned Vanguard ETFs in favor of competing products from BlackRock’s (NYSE: BLK ) iShares unit, the world’s largest ETF issuer. New Frontier said it is replacing positions in the Vanguard ETFs with the iShares Core MSCI Europe ETF (NYSEARCA: IEUR ) , the iShares Core MSCI Emerging Markets ETF (NYSEARCA: IEMG ) and the iShares Core MSCI Pacific ETF (NYSEARCA: IPAC ) . “These are institutional quality ETFs with known exposures to known indexes with stable histories and differentiated risk premiums. Our patented rebalance test, which signals when portfolios are meaningfully different from optimal, provided rigorous quantitative justification for the trades,” said New Frontier. Part of the iShares core lineup targeted at cost-conscious advisors and investors, IEUR, IEMG and IPAC have nearly $10 billion in combined assets under management, with IEMG controlling over $7.4 billion of that total. IEMG continues to be a popular alternative for investors – professional and retail – looking for a cost-efficient alternative to the iShares MSCI Emerging Markets ETF (NYSEARCA: EEM ) . IEMG’s annual fee is 0.18% compared to 0.69% on EEM . “Vanguard’s reconstituted ETFs represent an expanded level of one-stop diversification for investors. However, the upshot is that they will homogenize important global risk premiums, limiting the benefit of sophisticated global ETF asset management. Other concerns include the difficulty of controlling risk during the transition period as well as possible front-running by various market entities,” adds New Frontier. VEA, VGK, VPL and VWO will all see significantly increased small-cap exposure as a result of the index transitions. Under the funds’ new benchmarks, small-cap stocks will account for approximately 9-11% of each fund, according to Vanguard. VEA will also add Canadian stocks for the first time, and it is expected the ETF will eventually hold a weight of up to 8.2% in Canadian equities. iShares Core MSCI Europe ETF (click to enlarge) Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.