Shifts in VG Tracking Indexes Announced

[ruralavalon]

Total International - will it lose small caps and Canada?

No -- it does include Canada at a weight of 8.25% -- http://www.ftse.com/Indices/FTSE_All_Wo ... /GXUSS.pdf .

[RustyShackleford]

My main concern would be maintaining the ability to tax loss harvest between VEU/VXUS as those are the core of my taxable accounts. I think this tax loss harvesting would still be allowed given the change.

Vanguard FTSE All-World ex-US ETF (VEU) ->FTSE All-World ex US Index->2267 stocks
Vanguard Total International Stock ETF (VXUS) ->FTSE Global All Cap ex US Index->5313 stocks

I don't see any difference in TLH.. approximately

.9 part VEU +.1 part VSS = VXUS

I am confused by what you wrote here. Do you think these will still be safe as TLH partners?

Like Newton Apple, these 2 funds are my entire taxable account and are TLH partners whenever the international market tanks.

In my opinion, TLH between the two would still be allowed as the funds are significantly different. Boglenaut is just pointing out that you can better equate VEU to VXUS by adding small caps (VSS). I don't even bother with this to keep it simple. My default buy is VXUS. If I need to TLH, I move to VEU. I don't plan to ever move the money back to VXUS unless there is another TLH opportunity. VEU is close enough to VXUS for my taste. The majority of my money will end up in VXUS hopefully anyways.

Having been audited recently - because the IRS examiners apparently were confused by my following-year Roth partial recharacterizations and thus thought I grossly underreported my TIRA distribution, but that's another story ... - I'm a little sensitive about this issue.

I wonder if the IRS would ever decide that if fund A and fund B are 80% the same (which I imagine is true for many of the pairs of funds that I and others here have used for TLH), that the exchanges are "wash" or 80% wash ? I'm told (by Fairmark folk) that the IRS is recently looking hard at Roth conversions and recharacterizations, which is presumably why I got audited for the fiorst time ever in 30+ years of taxpaying. I wonder if sometime soon their newest hobby-horse will be TLH'ing ? This would seem logical, because wise investors (like Bogleheads) probably did zillions of doillars of TLH'ing during the Great Recession, thus avoiding paying zillions of dollars of capital-gains tax since then and going forward. So it'd be hugely advantageous to disallow a bunch of TLH'ing. It'd also be hugely complicated for the IRS and for the audited taxpayer. The only thing that makes me feel better is that the statute of limitations has mostly expired for those TLH transactions. Of course, there is no limitation for fraud; I'm never clear on the definition of fraud versus interpreting the tax code differently - but it seems like TLH issues would not qualify (as fraud).

[Taylor Larimore]

Thanks for the correction. Post deleted.

Best wishes.
Taylor

[abuss368]

Total International - will it lose small caps and Canada?

No.

This is the description of the FTSE All-World ex US Index which is replacing the current index for Vanguard Total International Stock Index Fund:

The index comprises Large and Mid cap stocks providing coverage of Developed and Emerging Markets excluding the US.

Best wishes.
Taylor

Hi Taylor,

Canada is in and small caps are out?

Best.

[Ketawa]

This is the description of the FTSE All-World ex US Index which is replacing the current index for Vanguard Total International Stock Index Fund:

The original article was corrected. Total International Stock Index will be following the FTSE Global All Cap ex US Index.

http://www.vanguard.com/us/insights/article/fund-announcement-10022012

From the fact sheet for the index:

The FTSE Global All Cap ex US Index is part of a range of indices designed to help US investors
benchmark their international investments. The index comprises large, mid and small cap stocks
globally excluding the US. The index is derived from the FTSE Global Equity Index Series (GEIS),
which covers 98% of the world’s investable market capitalization.

http://www.ftse.com/Indices/FTSE_All_World_Index_Series/Downloads/GXUSS.pdf

[pauliec84]

I noticed that vanguard SCV and Emerging Market Fund are going to change indexes too.

Any idea how this is going to effect the smallness and value of the SCV, and the Smallness of the Emerging Market Fund?

[Taylor Larimore]

Bogleheads:

Morningstar has placed this article about the index switches on its homepage:

http://news.morningstar.com/articlenet/ ... ?id=569258

Best wishes.
Taylor

[dkturner]

This is the description of the FTSE All-World ex US Index which is replacing the current index for Vanguard Total International Stock Index Fund:

The index comprises Large and Mid cap stocks providing coverage of Developed and Emerging Markets excluding the US.

Taylor, the index you referenced is NOT the index that Vanguard will use to benchmark the Total International Index Fund. As per Vanguard's announcement it will be benchmarked to the FTSE Global All Cap ex US Index. The Global All Cap index includes small cap stocks as well as large and mid caps.

[Random Musings]

I noticed that vanguard SCV and Emerging Market Fund are going to change indexes too.

Any idea how this is going to effect the smallness and value of the SCV, and the Smallness of the Emerging Market Fund?

One thing I ded see was that their growth and value "offerings" have a NASDAQ GIDS post date of 10/1/12 (yesterday), but here is the look of their small-cap index - note that this index is relatively new and backtesting was used March 2011 and before.

CRSP Small-Cap

However, this little snippet comes from the CRSP site regarding the situation.

John C. Heaton, Joseph L. Gidwitz Professor of Finance and Deputy Dean for Faculty, and Lubos Pastor, Charles P. McQuaid Professor of Finance, both of the Chicago Booth School of Business, serve as consultants to the CRSP Indexes project and have been central to developing CRSP’s unique methodology. Consultations with Vanguard provided important practical insights for the development of the indexes. CRSP’s index methodology aims to minimize index turnover while delivering style purity. The innovative process of “packeting” cushions the movement of stocks between adjacent indexes and allows holdings to be shared across indexes. Other features of the methodology include a novel multidimensional approach to classifying stocks as value and growth.

I guess we will find out relatively soon.

[Easy Rhino]

You know Vanguard is running out of expenses to save when they need to switch index providers to save cash.

[Jerry_lee]

I noticed that vanguard SCV and Emerging Market Fund are going to change indexes too.

Any idea how this is going to effect the smallness and value of the SCV, and the Smallness of the Emerging Market Fund?

One thing I ded see was that their growth and value "offerings" have a NASDAQ GIDS post date of 10/1/12 (yesterday), but here is the look of their small-cap index - note that this index is relatively new and backtesting was used March 2011 and before.

CRSP Small-Cap

However, this little snippet comes from the CRSP site regarding the situation.

John C. Heaton, Joseph L. Gidwitz Professor of Finance and Deputy Dean for Faculty, and Lubos Pastor, Charles P. McQuaid Professor of Finance, both of the Chicago Booth School of Business, serve as consultants to the CRSP Indexes project and have been central to developing CRSP’s unique methodology. Consultations with Vanguard provided important practical insights for the development of the indexes. CRSP’s index methodology aims to minimize index turnover while delivering style purity. The innovative process of “packeting” cushions the movement of stocks between adjacent indexes and allows holdings to be shared across indexes. Other features of the methodology include a novel multidimensional approach to classifying stocks as value and growth.

I guess we will find out relatively soon.

Random,

I took a look at the cumulative annualized returns of the CRSP Small Cap index (1/01 to 3/11) and here is how it stacks up against other common small cap indexes/strategies:

Russell 2000 = +7.0%
CRSP Small Cap Index = +7.4%
MSCI 1750 Index = +8.3%
DFA US Small = +9.0%
DFA US Micro = +10.2%

Maybe CRSP is catching some of that negative Russell reconstitution action?

[rkhusky]

I noticed that vanguard SCV and Emerging Market Fund are going to change indexes too.

Any idea how this is going to effect the smallness and value of the SCV, and the Smallness of the Emerging Market Fund?

If VG is tracking this emerging markets index: http://www.ftse.com/Indices/FTSE_Emergi ... AWALLE.pdf, then it appears that it includes small caps. The VG EM fund has 902 stocks and has S. Korea, but no small caps, versus 793 for the FTSE fund, which doesn't include S. Korea, but has small caps.

[tomd37]

Houseblend,

Sent you a PM just now

[fanmail]

How does this impact VTI and VEU? Sorry if I am a little slow on the uptake here.

[Noobvestor]

A few thoughts:

1) Isn't switching indexing kind of an ongoing theme at Vanguard, and somewhat problematic in terms of (a) cost (trading), (b) cap gains (yes, I realize they are offsetting losses in this case, but that means fewer losses saved up for the future, right?) and (c) tracking error (maybe the wrong term for it, but I mean: switching strategies mid-game repeatedly, with the possibility of out- or under-performing a true continuous approach).

2) I can't follow everything in this thread, being a lazy Boglehead. Anyone care to summarize on a Wiki page, or in this thread, or otherwise, what these changes mean? I'm seeing conflicting claims (even after the apparent correction made internally by Vanguard) about the impacts, like whether the small weighting of the EM fund will disappear, change, etc...

I'm a loyal Vanguardian, with most of my assets in their care, but it bothers me a bit how many course corrections they seem to make.

[stratton]

Four Vanguard etfs offered in Canada are getting new indexes too.

Paul

[Jerry_lee]

A few thoughts:

1) Isn't switching indexing kind of an ongoing theme at Vanguard, and somewhat problematic in terms of (a) cost (trading), (b) cap gains (yes, I realize they are offsetting losses in this case, but that means fewer losses saved up for the future, right?) and (c) tracking error (maybe the wrong term for it, but I mean: switching strategies mid-game repeatedly, with the possibility of out- or under-performing a true continuous approach).

2) I can't follow everything in this thread, being a lazy Boglehead. Anyone care to summarize on a Wiki page, or in this thread, or otherwise, what these changes mean? I'm seeing conflicting claims (even after the apparent correction made internally by Vanguard) about the impacts, like whether the small weighting of the EM fund will disappear, change, etc...

I'm a loyal Vanguardian, with most of my assets in their care, but it bothers me a bit how many course corrections they seem to make.

Yes,

You are correct. Can anyone explain to me why Vanguard is unwilling to develop internal indexes for their funds? It doesn't seem that terribly difficult. If they had their own proprietary indexes, they could tweak them and update them all they wanted without making these wholesale vendor changes. Farming out the selection of the stocks and bonds for your index funds doesn't seem like a very prudent thing to do. If you can implement, you can construct. 't is not a problem if the indexes aren't affected, but as my previous posts have shown, Vanguard Small Indexes experienced very different results pre/post S&P and MSCI conversion (SG benefited massively, SV got burned).

Luckily, CRSP is an organization you can stick with, and these new indexes seem to be more about index implementation (when to buy/sell and how much) than construction (what constitutes value/growth, what is a small vs. mid cap stock, etc.). And for the $ in TSM strategies,this is much to do about nothing (all TSM portfolios are basically the same).

[abuss368]

A few thoughts:

1) Isn't switching indexing kind of an ongoing theme at Vanguard, and somewhat problematic in terms of (a) cost (trading), (b) cap gains (yes, I realize they are offsetting losses in this case, but that means fewer losses saved up for the future, right?) and (c) tracking error (maybe the wrong term for it, but I mean: switching strategies mid-game repeatedly, with the possibility of out- or under-performing a true continuous approach).

2) I can't follow everything in this thread, being a lazy Boglehead. Anyone care to summarize on a Wiki page, or in this thread, or otherwise, what these changes mean? I'm seeing conflicting claims (even after the apparent correction made internally by Vanguard) about the impacts, like whether the small weighting of the EM fund will disappear, change, etc...

I'm a loyal Vanguardian, with most of my assets in their care, but it bothers me a bit how many course corrections they seem to make.

Yes,

You are correct. Can anyone explain to me why Vanguard is unwilling to develop internal indexes for their funds? It doesn't seem that terribly difficult. If they had their own proprietary indexes, they could tweak them and update them all they wanted without making these wholesale vendor changes. Farming out the selection of the stocks and bonds for your index funds doesn't seem like a very prudent thing to do. If you can implement, you can construct. 't is not a problem if the indexes aren't affected, but as my previous posts have shown, Vanguard Small Indexes experienced very different results pre/post S&P and MSCI conversion (SG benefited massively, SV got burned).

Luckily, CRSP is an organization you can stick with, and these new indexes seem to be more about index implementation (when to buy/sell and how much) than construction (what constitutes value/growth, what is a small vs. mid cap stock, etc.). And for the $ in TSM strategies,this is much to do about nothing (all TSM portfolios are basically the same).

Hi Jerry_lee,

I have often wondered to my Vanguard does not construct their own index. Perhaps internal costs?

I wonder if any of this is related to the recent Schwab announcement?

Best.

[Karl]

Wonder how much this will help them lower expenses.

After 18 years with Vanguard I've come to expect cheap. So much so that 6 basis point for TSM Admiral is starting to look pretty darn steep.

[stlutz]

I have often wondered to my Vanguard does not construct their own index. Perhaps internal costs?

One factor at least is that the SEC doesn't like ETF providers to have their own indices.

[Archie Sinclair]

A few thoughts:

1) Isn't switching indexing kind of an ongoing theme at Vanguard, and somewhat problematic in terms of (a) cost (trading), (b) cap gains (yes, I realize they are offsetting losses in this case, but that means fewer losses saved up for the future, right?) and (c) tracking error (maybe the wrong term for it, but I mean: switching strategies mid-game repeatedly, with the possibility of out- or under-performing a true continuous approach).

2) I can't follow everything in this thread, being a lazy Boglehead. Anyone care to summarize on a Wiki page, or in this thread, or otherwise, what these changes mean? I'm seeing conflicting claims (even after the apparent correction made internally by Vanguard) about the impacts, like whether the small weighting of the EM fund will disappear, change, etc...

I'm a loyal Vanguardian, with most of my assets in their care, but it bothers me a bit how many course corrections they seem to make.

Yes,

You are correct. Can anyone explain to me why Vanguard is unwilling to develop internal indexes for their funds? It doesn't seem that terribly difficult. If they had their own proprietary indexes, they could tweak them and update them all they wanted without making these wholesale vendor changes. Farming out the selection of the stocks and bonds for your index funds doesn't seem like a very prudent thing to do. If you can implement, you can construct. 't is not a problem if the indexes aren't affected, but as my previous posts have shown, Vanguard Small Indexes experienced very different results pre/post S&P and MSCI conversion (SG benefited massively, SV got burned).

Luckily, CRSP is an organization you can stick with, and these new indexes seem to be more about index implementation (when to buy/sell and how much) than construction (what constitutes value/growth, what is a small vs. mid cap stock, etc.). And for the $ in TSM strategies,this is much to do about nothing (all TSM portfolios are basically the same).

Hi Jerry_lee,

I have often wondered to my Vanguard does not construct their own index. Perhaps internal costs?

I wonder if any of this is related to the recent Schwab announcement?

Best.

I think it's better to have an independent index provider. The stated objective of an index fund is to follow the performance of the index as closely as possible, and we judge the managers of the fund by how close they get. Although Vanguard has a great reputation, it would be worrying if Vanguard were both the runner and the person keeping the stopwatch. Vanguard's fees are low enough that we can splurge a few pennies to hire a reputable guy to keep the stopwatch.

[Noobvestor]

A few thoughts:

1) Isn't switching indexing kind of an ongoing theme at Vanguard, and somewhat problematic in terms of (a) cost (trading), (b) cap gains (yes, I realize they are offsetting losses in this case, but that means fewer losses saved up for the future, right?) and (c) tracking error (maybe the wrong term for it, but I mean: switching strategies mid-game repeatedly, with the possibility of out- or under-performing a true continuous approach).

2) I can't follow everything in this thread, being a lazy Boglehead. Anyone care to summarize on a Wiki page, or in this thread, or otherwise, what these changes mean? I'm seeing conflicting claims (even after the apparent correction made internally by Vanguard) about the impacts, like whether the small weighting of the EM fund will disappear, change, etc...

I'm a loyal Vanguardian, with most of my assets in their care, but it bothers me a bit how many course corrections they seem to make.

Yes,

You are correct. Can anyone explain to me why Vanguard is unwilling to develop internal indexes for their funds? It doesn't seem that terribly difficult. If they had their own proprietary indexes, they could tweak them and update them all they wanted without making these wholesale vendor changes. Farming out the selection of the stocks and bonds for your index funds doesn't seem like a very prudent thing to do. If you can implement, you can construct. 't is not a problem if the indexes aren't affected, but as my previous posts have shown, Vanguard Small Indexes experienced very different results pre/post S&P and MSCI conversion (SG benefited massively, SV got burned).

Luckily, CRSP is an organization you can stick with, and these new indexes seem to be more about index implementation (when to buy/sell and how much) than construction (what constitutes value/growth, what is a small vs. mid cap stock, etc.). And for the $ in TSM strategies,this is much to do about nothing (all TSM portfolios are basically the same).

Hi Jerry_lee,

I have often wondered to my Vanguard does not construct their own index. Perhaps internal costs?

I wonder if any of this is related to the recent Schwab announcement?

Best.

I think it's better to have an independent index provider. The stated objective of an index fund is to follow the performance of the index as closely as possible, and we judge the managers of the fund by how close they get. Although Vanguard has a great reputation, it would be worrying if Vanguard were both the runner and the person keeping the stopwatch. Vanguard's fees are low enough that we can splurge a few pennies to hire a reputable guy to keep the stopwatch.

True, though maybe they could use the same guy with the same stopwatch for each year's time trials, so that the results will remain consistent

[rkhusky]

It appears that we will now have an emerging markets fund with large and small caps, an all cap total international, and a small international fund with developed and emerging markets. There doesn't appear to be a way to separate out small developed market stocks.

In my 401K I have a large developed market fund and used VG's large emerging market fund plus the small international fund to create my own total international. Perhaps I am going to have to sell all the international in my 401K and do all my international investing with Vanguard.

[nisiprius]

Can anyone explain to me why Vanguard is unwilling to develop internal indexes for their funds? It doesn't seem that terribly difficult.

That's effectively what they did. Many? All? of the MSCI indices Vanguard had been using were "co-developed" by Vanguard and MSCI. It was an outgrowth of Vanguard's tiff with S&P, which wanted them to pay a double licensing fee to use their indices with ETFs.

[Taylor Larimore]

Anyone care to summarize on a Wiki page, or in this thread, or otherwise, what these changes mean?

I think they mean what Mr. Sauter said in the Vanguard Announcement:

"The changes to these market benchmarks should save millions of dollars in licensing expenses for the funds—savings that will ultimately benefit shareholders."

As far as index construction is concerned, few people know more about index construction than Gus Sauter:

Mr. Sauter joined Vanguard as head of the firm's internal equity management group on October 5, 1987, which was two weeks prior to the market crash when stocks declined more than 22% in a single day. At that time, Vanguard offered two index funds—Vanguard 500 Index Fund and Vanguard Total Bond Market Index Fund, with aggregate assets of $1.2 billion. Mr. Sauter assumed responsibility for the equity index management function, where he developed new trading programs and strategies that minimized trading costs and enhanced benchmark tracking precision.

Vanguard introduced its second equity index portfolio (Vanguard Extended Market Index Fund) in December 1987 and, in subsequent years, Mr. Sauter worked to expand Vanguard's index lineup: Vanguard Small Capitalization Index Fund (1989); Vanguard European Index Fund (1990); Vanguard Pacific Index Fund (1990); Vanguard Total Stock Market Index Fund (1992); Vanguard Balanced Index Fund (1992); Vanguard Growth Index Fund (1992); and Vanguard Value Index Fund (1992). From this pioneering stage, Vanguard has emerged as a worldwide leader in indexing, managing more than $1.1 trillion in aggregate index assets. (underline mine)

I am confident that the announced changes, under Mr. Sauter's expertise, are for the betterment of Vanguard Index fund (and ETF) investors.

That's my "summary."

Best wishes
Taylor

[rkhusky]

In case anyone else was also curious, FTSE Global All Cap ex-US covers three countries that MSCI ACWI ex-US IMI didn't:

Morocco, Pakistan, and the United Arab Emirates.

On the other hand MSCI has around 9,000 positions, while FTSE has only about 5,300.

The only thing that concerns me is the 5yr total return of the FTSE Index as of Q3 2012 was -15.7% annually (the index incepted on 9/1/2003, and the earliest they indicate we are likely to get 10 year returns seems to be at the end of next quarter). In contrast, MSCI posted a 5yr of -2.97% through Aug. 2012 (Q3 data doesn't seem to be out yet). I don't believe anything happened in Sept. that's going to cause MSCI to shift it's quarter-end number dramatically downwards.

Curious to know:
1. If anyone has access to Q2 data for both indexes while we await Q3 data.
2. What would cause the difference in performance.

Edit: Found 9/30/12 1yr performance: FTSE posted 15.1%, while MSCI posted 14.36%. I would have expected the longer term performance to be similar as welll.

Thanks.

Frankly, I would prefer more stocks and more diversification versus saving a fraction of a basis point. The same goes for the new EM fund that has fewer stocks, while adding small caps to the previous large caps.

[ClosetIndexer]

Is there historical returns data for the FTSE and/or CRSP indexes freely available online? One of the nice things about MSCI is that they're one of the easiest index providers to get historical data from.

[Random Musings]

Random,

I took a look at the cumulative annualized returns of the CRSP Small Cap index (1/01 to 3/11) and here is how it stacks up against other common small cap indexes/strategies:

Russell 2000 = +7.0%
CRSP Small Cap Index = +7.4%
MSCI 1750 Index = +8.3%
DFA US Small = +9.0%
DFA US Micro = +10.2%

Maybe CRSP is catching some of that negative Russell reconstitution action?

The question that I would pose Vanguard would be why would they trade a couple of basis points a year for 90 basis points of return? Not sure if the backtest incorporates the trading strategies or not. If the simulation does, I don't see the benefit.

RM

[archbish99]

True, though maybe they could use the same guy with the same stopwatch for each year's time trials, so that the results will remain consistent

The problem comes when the guy holding the stopwatch wants a big raise every year. They're not doing more work as the fund gets larger. It sounds like the big win here is being able to lock in a price over a longer stretch of time. The guy with the stopwatch has a contract he can't renegotiate every year.

[555]

"You know Vanguard is running out of expenses to save when they need to switch index providers to save cash."

This article has some numbers.
http://www.fool.com/investing/general/2 ... cliff.aspx

In total, $537 billion in assets under management will be shifting away from MSCI's benchmarks ... Vanguard provided MSCI $24 million in operating income last year, whereas the remaining $7 trillion in assets currently benchmarked to MSCI's indexes tallied an additional $298 million in operating income for MSCI.

So it looks like about half a basis point.

[louis c]

Very true, I completely forgot about that. It seems the I Fund was incepted on May 1, 2001. I wish the TSP would make a transition to a broader international fund.

Me too. I currently own iShares MSCI Canada Index (EWC) to fill the gap. I started moving other accounts to VXUS, but it is currently not enough. The goal is to eventually have just G, F, and C under TSP, and international in other accounts. Eventually, the plan is to only have just VXUS.

[stan1]

Vanguard Article
https://personal.vanguard.com/us/insigh ... hannel=MFN

We don't expect any capital gains distributions to shareholders to result from the transition to the new benchmarks. Each affected fund currently has realized capital losses that can be used to offset any realized gains.

My emphasis added. I sure hope they are right about transitioning South Korea out of Emerging Markets with no capital gains distributions.

[grabiner]

I noticed that vanguard SCV and Emerging Market Fund are going to change indexes too.

Any idea how this is going to effect the smallness and value of the SCV, and the Smallness of the Emerging Market Fund?

If VG is tracking this emerging markets index: http://www.ftse.com/Indices/FTSE_Emergi ... AWALLE.pdf, then it appears that it includes small caps. The VG EM fund has 902 stocks and has S. Korea, but no small caps, versus 793 for the FTSE fund, which doesn't include S. Korea, but has small caps.

There is more than one index in the series. FTSE has an Emerging Markets index and a Global All-Cap Emerging index. If the Vanguard article is correct, then Vanguard Emerging Markets Index will track the FTSE Emerging Markets index, which I believe is large-cap and mid-cap only.

[grabiner]

Vanguard Article
https://personal.vanguard.com/us/insigh ... hannel=MFN

We don't expect any capital gains distributions to shareholders to result from the transition to the new benchmarks. Each affected fund currently has realized capital losses that can be used to offset any realized gains.

My emphasis added. I sure hope they are right about transitioning South Korea out of Emerging Markets with no capital gains distributions.

I wouldn't worry. Thanks partly to ETF redemptions, Emerging Markets Index has a 5% realized loss, and currently only a 2% unrealized gain, so it could sell all of its stock without realizing a capital gain.

South Korea is 15% of the index, and I doubt that the South Korea stock in the index has the 33% unrealized gain that would be needed to force the fund to realize a capital gain. If the South Korean market rises 30% before the change takes place, then we might see some realized gains.

[ClosetIndexer]

I noticed that vanguard SCV and Emerging Market Fund are going to change indexes too.

Any idea how this is going to effect the smallness and value of the SCV, and the Smallness of the Emerging Market Fund?

If VG is tracking this emerging markets index: http://www.ftse.com/Indices/FTSE_Emergi ... AWALLE.pdf, then it appears that it includes small caps. The VG EM fund has 902 stocks and has S. Korea, but no small caps, versus 793 for the FTSE fund, which doesn't include S. Korea, but has small caps.

There is more than one index in the series. FTSE has an Emerging Markets index and a Global All-Cap Emerging index. If the Vanguard article is correct, then Vanguard Emerging Markets Index will track the FTSE Emerging Markets index, which I believe is large-cap and mid-cap only.

That also seems to make sense since they're looking for lower-cost, but essentially matching indexes. So we would have MSCI EM (old) vs. FTSE EM (new). Aside from the loss of South Korea (and therefore Samsung as the #1 holding), they look basically the same in terms of # of firms and company size. (Note the dates of those fact sheets are off by a month, which is why things like the order of the top holdings is different.)

[AndroAsc]

So can we have a summary on the impact of index changes? Please correct me if I am wrong:

Domestic Index Funds
From MSCI to CRSP indexes. Supposedly CRSP indexes are more efficient, etc etc... No change in style (value/growth), composition or size (large/med/small) for all index funds

Vanguard International Index Fund
Switches from MSCI ACWI ex USA IMI Index to FTSE Global All Cap ex US Index. What's the difference between the 2? Canada and international small-caps was already in the old version of Vanguard International, so what's new with the FTSE index in terms of composition?

Vanguard Emerging Market Fund
Switches from MSCI Emerging Markets Index to FTSE Emerging Index. Both index focus on large cap stocks, MSCI has S.Korea, FTSE does not. Is that the only difference between the two in terms of composition?

Final Question
So... if Vanguard International is following the FTSE index... how is it different from the Vanguard FTSE All-World ex-US Index fund?

[LadyGeek]

For a broader perspective, Vanguard Canada also announced benchmark changes for 4 ETF's: Vanguard to change target benchmarks for 4 ETFs

Reference: Vanguard Canada Pressroom

See the Financial Webring Forum thread (our sister Canadian site): Vanguard (US) Changing Indices for Several ETFs

[stlutz]

I'm sure multiple threads may spin off of this, but taking a look at the domestic indexes, a few notes I have:

--CRSP indicates that there are 3800 companies in its total market index. VG Total Market currently has 3277. Not sure that there will end up being any practical difference with this.

--The value/growth indexes are a little different from the other providers. In the CRSP indexes, a company is either value or growth, not some of both (aside from the smoothing in terms of moving from one or the other). Aside from that, they are very similar in that 50% of the market cap. is "growth" and 50% is "value", so I don't think there's really much change there.

--The smallcap index I can't quite figure out. The top 10 holdings are all too big to be in VG's current small cap offering. And it includes fewer stocks than VG's current smallcap fund has (1361 vs. 1741). On the other hand, the median market cap. that both are listing shows the CRSP to be smaller (1021 vs. 1700M). To really figure out the "smallness" of both, we need the weighted average market cap., which neither CRSP or VG provides. But, it looks to me like the new index is larger and has fewer stocks, which gets a thumbs down from me.

I suppose all of the hand wringing about these changes continues to push me toward the Taylor Larimore/Total Market approach. Regardless of index provider, the total market is pretty much the same. As Jerry Lee demonstrates above, however, how you define "small cap" can make a big difference in your returns, and there isn't always an obvious reason as to why.

[ClosetIndexer]

Vanguard International Index Fund
Switches from MSCI ACWI ex USA IMI Index to FTSE Global All Cap ex US Index. What's the difference between the 2? Canada and international small-caps was already in the old version of Vanguard International, so what's new with the FTSE index in terms of composition?

Looking at the fact sheets from MSCI and FTSE, it appears that the MSCI index has more companies (6166 vs 5313), and they are a smaller on average (2.7B vs 3.4B). (Note that the FTSE fact sheet is a month newer and the market did go up during that period, but only by about 2%, so that only accounts for a small fraction of the size difference.)

Shouldn't make a big difference, but I do expect to see a bit of a negative size loading. Unfortunately without historical returns for the index, it's hard to tell exactly how much of one.

Vanguard Emerging Market Fund
Switches from MSCI Emerging Markets Index to FTSE Emerging Index. Both index focus on large cap stocks, MSCI has S.Korea, FTSE does not. Is that the only difference between the two in terms of composition?

As far as I can tell, yes. See my post above.

Final Question
So... if Vanguard International is following the FTSE index... how is it different from the Vanguard FTSE All-World ex-US Index fund?

Inclusion of small-caps, just like now.

Domestic Index Funds
From MSCI to CRSP indexes. Supposedly CRSP indexes are more efficient, etc etc... No change in style (value/growth), composition or size (large/med/small) for all index funds

To answer this properly, we need historical returns for the CRSP style indexes to do regressions. Haven't looked too hard for that yet.
Edit: Ah, cool, CRSP does publish index returns: http://www.crsp.com/indexes/index-const ... lists.html. Will get back with regression results in a bit.

[grabiner]

Final Question
So... if Vanguard International is following the FTSE index... how is it different from the Vanguard FTSE All-World ex-US Index fund?

FTSE All-World Ex-US is large-cap only; Total International follows the Global All-Cap Ex-US index, which includes small-caps as well.

Thus 90% FTSE All-World Ex-US plus 10% FTSE All-World Ex-US Small-Cap should be equivalent to Total International.

[ClosetIndexer]

OK, I did some regressions to compare the size and value loadings of the MSCI indexes Vanguard has been using for its domestic funds for the past decade to the CRSP indexes they are switching to. Here are the results over the 11 years for which the CRSP indexes have data. (Although we should keep in mind that the CRSP index returns are back-tested, based on these results I'm not too concerned about bias there.)

Code: Select all

All 2001/07-2012/06

Small
                                Mkt-Rf    SmB     HmL     Mom     Alpha
    MSCI Small Cap               1.02    0.71    0.17    -0.02    -0.15%   R^2 = 0.991
       Std. Error                0.01    0.02    0.02     0.01     0.63%

    CRSP Small Cap               1.01    0.64    0.13    -0.02     0.44%   R^2 = 0.990
       Std. Error                0.01    0.02    0.02     0.01     0.64%

      
    MSCI Small Value             0.91    0.63    0.52    -0.03     0.47%   R^2 = 0.970
       Std. Error                0.02    0.04    0.04     0.02     1.08%

    CRSP Small Value             0.92    0.58    0.48    -0.04     1.22%   R^2 = 0.972
       Std. Error                0.02    0.04    0.03     0.02     1.04%


Mid
                                Mkt-Rf    SmB     HmL     Mom     Alpha
    MSCI Mid Cap                 1.04    0.32    0.04     0.01     0.76%   R^2 = 0.969
       Std. Error                0.02    0.04    0.03     0.02     1.04%

    CRSP Mid Cap                 1.03    0.26    0.04     0.02     0.76%   R^2 = 0.976
       Std. Error                0.02    0.03    0.03     0.02     0.89%

    MSCI Mid Value               0.94    0.25    0.39    -0.02     1.93%   R^2 = 0.955
       Std. Error                0.03    0.04    0.04     0.02     1.21%

    CRSP Mid Value               0.92    0.23    0.39    -0.05     0.96%   R^2 = 0.955
       Std. Error                0.03    0.04    0.04     0.02     1.20%


      
Mid-large

                                Mkt-Rf    SmB     HmL     Mom     Alpha
    MSCI Prime Market            0.98   -0.11   -0.02    -0.00    -0.19%   R^2 = 0.995
       Std. Error                0.01    0.01    0.01     0.01     0.36%

    CRSP Large Cap               0.98   -0.12   -0.03     0.00    -0.35%   R^2 = 0.994
       Std. Error                0.01    0.01    0.01     0.01     0.37%

      
   MSCI Prime Value             0.92   -0.19    0.32    -0.02     0.17%   R^2 = 0.968
       Std. Error                0.02    0.03    0.03     0.02     0.89%

    CRSP Large Value             0.92   -0.20    0.23    -0.03    -0.48%   R^2 = 0.965
       Std. Error                0.02    0.03    0.03     0.02     0.92%


*Note: CRSP's 'large' indexes correspond to MSCI's 'prime', while CRSP's 'mega' correspond to MSCI's 'large'.


So basically they're so similar it's freaky. The Russell and S&P indexes show much more significant differences. These are about as close as you can get to being drop-in replacements without being identical. The only two noticeable differences are in the Mid and Large value funds, where we see slightly lower value loadings for CRSP in the large cap, and perhaps slightly more negative momentum in the mid-cap. Both differences are small though, and it turns out both are from the earlier years of the sample only. If we just look at 2006/01-2012/06, for example, we get this:

Code: Select all

2006/01-2012/06:

                                Mkt-Rf    SmB     HmL     Mom     Alpha
    MSCI Prime Value             0.92   -0.21    0.33    -0.01    -0.16%   R^2 = 0.972
       Std. Error                0.02    0.05    0.04     0.02     1.22%

    CRSP Large Value             0.90   -0.20    0.29    -0.01    -0.25%   R^2 = 0.967
       Std. Error                0.02    0.05    0.05     0.02     1.28%


    MSCI Mid Value               0.97    0.27    0.21    -0.08    -0.14%   R^2 = 0.972
       Std. Error                0.03    0.06    0.05     0.02     1.41%

    CRSP Mid Value               0.96    0.28    0.24    -0.10     0.01%   R^2 = 0.966
       Std. Error                0.03    0.06    0.06     0.03     1.56%



So not only are they statistically identical, they're almost completely identical. I was originally a bit concerned about these changes, but given the similarity between these indexes, I don't think it's going to make any noticable difference (aside from, hopefully, slightly lower fees eventually).

Edit: Just for fun, ran the broad indexes too:

Code: Select all

2001/07-2012/06:

                                Mkt-Rf    SmB     HmL     Mom     Alpha
    MSCI Investible Mkt          0.99   -0.02   -0.00    -0.00    -0.24%   R^2 = 0.996
       Std. Error                0.01    0.01    0.01     0.01     0.32%

    CRSP Total Mkt               0.98    0.01    0.00     0.00    -0.28%   R^2 = 0.997
       Std. Error                0.01    0.01    0.01     0.00     0.29%


So as expected, the CRSP index just removes the MSCI 2500's very slight large tilt. Sounds good to me. Also removes that differentiation from the Schwab fund based on the Russell 3000...

[Taylor Larimore]

Bogleheads:

For those who enjoy detail, this is a link to the CRSP U.S.Equity Indexes Methodology Guide:

http://www.crsp.com/documentation/pdfs/ ... -Guide.pdf

This is a link to the FTSE All-World EX U.S. Fact Sheet:

http://www.ftse.com/Indices/FTSE_All_Wo ... WXUSAS.pdf

Best wishes.
Taylor

[rkhusky]

I noticed that vanguard SCV and Emerging Market Fund are going to change indexes too.

Any idea how this is going to effect the smallness and value of the SCV, and the Smallness of the Emerging Market Fund?

If VG is tracking this emerging markets index: http://www.ftse.com/Indices/FTSE_Emergi ... AWALLE.pdf, then it appears that it includes small caps. The VG EM fund has 902 stocks and has S. Korea, but no small caps, versus 793 for the FTSE fund, which doesn't include S. Korea, but has small caps.

There is more than one index in the series. FTSE has an Emerging Markets index and a Global All-Cap Emerging index. If the Vanguard article is correct, then Vanguard Emerging Markets Index will track the FTSE Emerging Markets index, which I believe is large-cap and mid-cap only.

This page http://www.ftse.com/Indices/FTSE_Emergi ... /index.jsp indicates that FTSE Emerging consists of L/M (large/medium).
If one looks at the actual median market caps, VG's current EM is at $16.2B, the current VG FTSE Small Cap is at $1.3B and the new FTSE EM (AWALLE) might be at $1.8B (average=$4.2B, smallest=$50M).
In terms of M*'s breakdown, VG's current EM has 12% midcap and virtually no small cap, whereas the current VG FTSE Small Cap has 63% midcap and 32% smallcap.
Compared to the previous VG funds, the new one looks like it must include some small caps.

[rkhusky]

I noticed that vanguard SCV and Emerging Market Fund are going to change indexes too.

Any idea how this is going to effect the smallness and value of the SCV, and the Smallness of the Emerging Market Fund?

If VG is tracking this emerging markets index: http://www.ftse.com/Indices/FTSE_Emergi ... AWALLE.pdf, then it appears that it includes small caps. The VG EM fund has 902 stocks and has S. Korea, but no small caps, versus 793 for the FTSE fund, which doesn't include S. Korea, but has small caps.

There is more than one index in the series. FTSE has an Emerging Markets index and a Global All-Cap Emerging index. If the Vanguard article is correct, then Vanguard Emerging Markets Index will track the FTSE Emerging Markets index, which I believe is large-cap and mid-cap only.

That also seems to make sense since they're looking for lower-cost, but essentially matching indexes. So we would have MSCI EM (old) vs. FTSE EM (new). Aside from the loss of South Korea (and therefore Samsung as the #1 holding), they look basically the same in terms of # of firms and company size. (Note the dates of those fact sheets are off by a month, which is why things like the order of the top holdings is different.)

The MSCI fact sheet above does not seem to match the VG EM fund in terms of median market caps: $2.0B vs. $16.2B (https://personal.vanguard.com/us/funds/ ... st=tab%3A2)

[sscritic]

Gus Sauter is going to tell all in a "live video webcast" on Tuesday. I could give you the time, but I deleted the email already. (I said could because I know how to dig through my trash)

Register and ask your questions.

[dmcmahon]

Another article about the change:

http://finance.yahoo.com/news/vanguard- ... 37837.html

Large institutions will struggle to understand these new indexes well enough to be comfortable with them. MSCI is getting booted, we suspect, largely due to cost. MSCI charges a premium price in the index world. But it charges that premium price because, honestly, it can.

MSCI’s indexes -- particularly the international indexes -- have numerous salutary benefits if you’re a hard-core index wonk running lots of models. Its indexes follow clean, transparent rules. They tend to dovetail into each other nicely with minimal overlap. They’ve got long tenures, and a presence on almost every major data service and analytical platform.

[BlueEars]

OK, I did some regressions to compare the size and value loadings of the MSCI indexes Vanguard has been using for its domestic funds for the past decade to the CRSP indexes they are switching to. Here are the results over the 11 years for which the CRSP indexes have data. (Although we should keep in mind that the CRSP index returns are back-tested, based on these results I'm not too concerned about bias there.)
...

Thanks very much for doing this regression work. Reduces the immediate anxiety for me. Also I really needed that monthly CRSP data link.

[JamesSFO]

Another article about the change:

http://finance.yahoo.com/news/vanguard- ... 37837.html

Large institutions will struggle to understand these new indexes well enough to be comfortable with them. MSCI is getting booted, we suspect, largely due to cost. MSCI charges a premium price in the index world. But it charges that premium price because, honestly, it can.

MSCI’s indexes -- particularly the international indexes -- have numerous salutary benefits if you’re a hard-core index wonk running lots of models. Its indexes follow clean, transparent rules. They tend to dovetail into each other nicely with minimal overlap. They’ve got long tenures, and a presence on almost every major data service and analytical platform.

This was really helpful, I hope there will be more articles both pro and con that explore the change.

[Kenster1]

The FTSE Global All Cap ex US Index is part of a range of indices designed to help US investors
benchmark their international investments. The index comprises large, mid and small cap stocks
globally excluding the US. The index is derived from the FTSE Global Equity Index Series (GEIS),
which covers 98% of the world’s investable market capitalization.

[rkhusky]

The Developed Market Index looks like it will change quite a bit, adding much smaller stocks, just like the Emerging Markets Index. The current VG DM fund has a median market cap of $32.7B with 932 stocks. The FTSE Developed ex North America Index (https://www.ftse.com/Indices/FTSE_All_W ... tsheet.pdf) has a median market cap of $3.3B with 1398 stocks. At least the number of stocks is going up when adding the small caps, unlike the new EM index.

I don't understand why Vanguard picked that index for VG DM, when it could have picked FTSE Developed ex US Index, which has a very similar median market cap of $3.1B with 1476 stocks. The only difference seems to be the exclusion of Canada, which makes up 9.1% of the ex US index. What does Vanguard have against Canada?