Products April 3, 2003

Vanguard to Shift 7 Index Fund Benchmarks

April 3, 2003 (PLANSPONSOR.com) - The Vanguard Group plans to change the benchmarks for seven of its funds, switching to seven newly developed Morgan Stanley Capital International (MSCI) indexes from a half dozen Standard & Poor's indexes and one Russell index.
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The shift is not wholly unexpected.   Vanguard had previously indicated its interest in changing some of the benchmarks tracked by its index funds since late last summer, it signed a nonexclusive agreement with MSCI to use its new indexes as benchmarks (see  Vanguard Asks for Leeway In Index Fund Shifts ).

Vanguard, which will now have 13 funds tracking 11 MSCI indexes, said it expects the new indexes to experience lower turnover than the current benchmarks, which translates into lower transaction costs.

The funds affected include the:

  • $7.4 billion Vanguard Growth Index;
  • $4 billion Vanguard Small-Cap Index;
  • $3.3 billion Vanguard Mid-Cap Index;
  • $3 billion Vanguard Value Index;
  • $1.3 billion Vanguard Small-Cap Value Index;
  • $487 million Vanguard Small-Cap Growth Index; and
  • $253 million Vanguard Variable Insurance Mid-Cap Index Portfolio.

Vanguard will still have five funds tracking two S&P indexes.   Eighteen months ago a court battle between the two over Vanguard’s use of S&P indices for its new VIPER family of exchange traded funds was resolved in S&P’s favor (see  S&P Prevails in Vanguard License Appeal ).

Vanguard said the new MSCI US stock indexes include segmentation, style, and construction methods that incorporate the best practices the mutual fund giant seeks in market benchmarks, including:

  • Objective, not subjective rules for index construction.
  • Market weightings that reflect only “floating” shares that are available and freely traded in the open market.
  • Market capitalization definitions that slightly overlap.
  • Identification of a stock as “growth” or “value” using a variety of factors.

The move to the new benchmarks is expected to occur between April 20 and Sept. 30, Vanguard said, and the switch should not result in significant capital gains to shareholders.   Vanguard said higher transition costs might be generated during the transition, but said it will try to minimize the trading-cost impact.

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