From the August 2013 issue of Research Magazine • Subscribe!

Vanguard Wraps Up Benchmark Switch, Taps Muni-Bond Fund Managers

Vanguard says that it has completed the six-month transition to FTSE and CRSP benchmarks for 22 index funds with some $650 billion in assets, including the $70 billion Vanguard Emerging Markets Stock Index Fund (VEIEX) and ETF (VWO), which previously tracked the MSCI Emerging Markets Index.

The fund giant “expects the transitions will result in lower expense ratios over time, providing significant value to index fund and ETF shareholders,” it explained in a statement. “In an environment in which index-licensing fees, in general, have represented a growing portion of the expenses that investors pay to own index funds and ETFs, Vanguard entered into long-term agreements with FTSE and CRSP that will provide cost certainty going forward.”

The new tracking indexes were developed by FTSE and the University of Chicago’s Center for Research in Security Prices (CRSP). According to Vanguard Chief Investment Officer Tim Buckley, the new benchmarks were picked last year because of their “cost, cost certainty, construction and coverage.”

“From a construction standpoint, the indexes from FTSE and CRSP meet Vanguard’s ‘best practice’ standards for market benchmarks,” he explained on Vanguard’s website. “These indexes incorporate full-float adjustment to reflect only those shares that are available and freely traded on the open market, providing a more accurate reflection of market movements. They buffer stock movement between market-capitalization segments, helping to reduce index turnover. They also incorporate multiple criteria to identify growth versus value. And they engage in gradual, orderly rebalancing to reflect market changes.”

The Vanguard CIO said that before the index switch, the fund giant used FTSE benchmarks for more than 20 index products with roughly $26 billion in assets. (FTSE has more than $3 trillion of assets benchmarked to its indexes worldwide.)

“With regard to CRSP, we’re impressed by the quality and depth of its staff, as well as their experience,” added Buckley. “The research organization pioneered the development of U.S. stock market data in 1960 that are widely used in academic and investment research.”

In other news, Vanguard said it has reassigned portfolio management responsibilities for five tax-exempt funds, four of which were managed by Michael Kobs, who has left the firm.

The portfolio manager for the $38.6 billion Vanguard Intermediate-Term Tax-Exempt Fund and the municipal bond portion of Vanguard Tax-Managed Balanced Fund is James D’Arcy.

Mathew M. Kiselak and Adam M. Ferguson are now co-managers of the $3.4 billion Vanguard New York Long-Term Tax-Exempt Fund, with Kiselak also taking responsibility for the $2.1 billion Vanguard New Jersey Long-Term Tax-Exempt Fund. In addition, Ferguson is a new co-manager of the $7.2 billion Vanguard California Intermediate-Term Tax-Exempt Fund, along with D’Arcy, who had been the fund’s sole manager.

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