ETFs changing indexes is common?

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the_wiki
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ETFs changing indexes is common?

Post by the_wiki »

Is it common for ETFs or Mutual funds to change indexes?

I've been interested in a lot of the SPDR funds from State Street because they track the S&P indexes. You have SPTM for the S&P1500, SPLG for the S&P500, SPMD for S&P400 and SPSM for the S&P600. So really easy to make your own index portfolio with various size factors.

However, in looking more closely and trying to compare past performance, it turns out all of the funds mentioned above, have only been tracking S&P indexes for 2-3 years. Before that they were tracking a different index. Maybe it's close enough, maybe not, but it makes it hard to compare.

And even worse, I stumbled across a Franklin Templeton Fund, USPX, that transitioned last month from a global equity fund to a US large cap equity fund. Talk about a switcheroo if that was a core investment of yours. I found it because it was the cheapest international fund listed on Schwab, but then in looking closer, it isn't international anymore. Schwab just hasn't recategorized it yet.


Is this as common as it seems? Makes me worried my "lazy" portfolio can't be so lazy. I could check in a few years later and find out I'm not investing in what I thought I was!
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Re: ETFs changing indexes is common?

Post by vineviz »

the_wiki wrote: Mon Sep 19, 2022 9:44 pm Is it common for ETFs or Mutual funds to change indexes?
I would say that minor index changes are not uncommon.

"Top-shelf" brands like Vanguard, State Street, iShares, Schwab, Invesco, etc. tend to undertake index changes infrequently, but I would expect perhaps a few changes over a 20-30 year period. But these changes are almost always minor (swapping form one US small cap value index to another US small cap value index, for example) and always announced.
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Re: ETFs changing indexes is common?

Post by sycamore »

At least for Vanguard it seems they've settled on a long-term index provider CRSP. The main reasons they switched to CRSP (as I recall) were lower index licensing costs, and reduced trading costs because of how index changes are managed. Assuming those costs are about as low as possible now, there's less incentive to switch.
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Re: ETFs changing indexes is common?

Post by exodusNH »

the_wiki wrote: Mon Sep 19, 2022 9:44 pm Is it common for ETFs or Mutual funds to change indexes?

I've been interested in a lot of the SPDR funds from State Street because they track the S&P indexes. You have SPTM for the S&P1500, SPLG for the S&P500, SPMD for S&P400 and SPSM for the S&P600. So really easy to make your own index portfolio with various size factors.

However, in looking more closely and trying to compare past performance, it turns out all of the funds mentioned above, have only been tracking S&P indexes for 2-3 years. Before that they were tracking a different index. Maybe it's close enough, maybe not, but it makes it hard to compare.

And even worse, I stumbled across a Franklin Templeton Fund, USPX, that transitioned last month from a global equity fund to a US large cap equity fund. Talk about a switcheroo if that was a core investment of yours. I found it because it was the cheapest international fund listed on Schwab, but then in looking closer, it isn't international anymore. Schwab just hasn't recategorized it yet.


Is this as common as it seems? Makes me worried my "lazy" portfolio can't be so lazy. I could check in a few years later and find out I'm not investing in what I thought I was!
This was more than an index change. They blew up the fund -- the name was "Franklin LibertyQ Global Equity". It was a "smart beta" fund -- actively managed, even if it was tightly rules-based or algorithmic.

It's less likely with truly passive funds. Vanguard made a switch a few years ago. When you look at their funds' pages, if you see "spliced index", that indicates they switched the index. They switched for cost reasons. On a big fund, it can be really disruptive both to the fund holders (potential capital gains distributions or using up past losses that have been banked, potentially increasing future distributions) as well to the market, since it's likely the smaller stocks that will fall out and can distort their values.

BTW, while costs are important, there are no practical differences between 0.03 and 0.07. At that level, other expenses that aren't captured in the ER dominate. The expense focus was important when 5.75% initial sales charges and 1% yearly fees were common.
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Re: ETFs changing indexes is common?

Post by JoMoney »

I wouldn't describe the issue as being "ETFs" which is just a subset of mutual funds that are tradeable on a exchange.
Some funds never claimed to track an index to begin with.
But, yeah... It happens. Even Vanguard's "Total Stock Market Index Fund" has changed the index it tracks several times, it's broad market focus has always been the same though, so changing the index of a broad market fund like that to a different index/index provider is a non-event.
For other index funds though, like with Vanguard's recent change on the index their "Vanguard Dividend Growth" / International ETF's (VIG & VIGI) the index change resulted in quite a bit of turnover in the fund and the distribution of some hefty capital gain tax distributions in the international version.
When Vanguard last changed the index their Developed Markets fund (VEA) tracks, it added small-caps to it, which some might like but for others it adds an increasingly risky market segment. People who wanted international small-caps could always add a fund to their portfolio, but it's hard for those that didn't want those risks to find a way to mitigate the changes that did to the portfolio.

On the positive side, most S&P 500 index funds have persisted in tracking that specific index.
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Re: ETFs changing indexes is common?

Post by alex_686 »

I can’t think of any ETFs that have changed their index. Note, I am not counting the times when the actual index changed.

And no, changing indexes is active management. It is not like there is a single pure index out there and that the funds are trying to game the system.

Most indexes that track the same asset class are very similar to each other in terms of assets held and performance. If one index does better it is more likely due to randomnesses rather then better construction.

The major differences between indexes is brand awareness and licensing fee.
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Re: ETFs changing indexes is common?

Post by JoMoney »

Even aside from mutual funds changing the index their "index funds" track (which there are many many examples of), indices themselves sometimes change their methodology in meaningful ways.
The S&P 500 used to exclude REITs then added them sometime in the early 2000's. It used to include some "international" stocks if they were traded on U.S. exchanges, large prominent multi-nationals like Shell and Unilever got kicked out after the change.
The Russell 3000 (1000+2000) series indices has changed the methodology multiple times do to the original reconstitution method being vulnerable to front-running, as well as some liquidity issues in smaller caps, and changes to how "Value" and "Growth" indices were determined.
Lots of indexes changed over time to use a float-adjusted market cap index, carrying stocks only at the market cap of shares actually available for trade on the market.
Some indexes have added requirements that companies that don't have a majority of voting rights publicly traded to be excluded and/or excluding shares of second-class issues that restrict voting rights.
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Re: ETFs changing indexes is common?

Post by the_wiki »

Thanks for the replies.

I understand it probably doesn't make a real difference swapping to a similar index. But it just means that manager risk is still not zero, even when picking index funds. Whether it is the index or index methodology that changes.

exodusNH wrote: Tue Sep 20, 2022 7:59 am

BTW, while costs are important, there are no practical differences between 0.03 and 0.07. At that level, other expenses that aren't captured in the ER dominate. The expense focus was important when 5.75% initial sales charges and 1% yearly fees were common.
I just often sort by gross expense ratio in a category, to get all the passive index funds at the top. It's not my only criteria.
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Re: ETFs changing indexes is common?

Post by alex_686 »

the_wiki wrote: Tue Sep 20, 2022 8:46 am I understand it probably doesn't make a real difference swapping to a similar index. But it just means that manager risk is still not zero, even when picking index funds. Whether it is the index or index methodology that changes.
To extend the question, invert the question. What is the risk of staying with an outdated index? What is the risk of staying with a outdated methodology? The market is dynamic - if the market changes shouldn't the index as well. There are flaws in all indexes. Subjective judgments are required.

I would strongly argue that there is less risk in actively managing this risk instead of listless drifting.
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Re: ETFs changing indexes is common?

Post by Tyler9000 »

Vanguard has changed index providers several times over the years. I wouldn’t say the real-world impact is that noticeable, but it’s not uncommon.

On the more extreme end, one of the more egregious changes I’ve seen was when Vanguard changed a precious metals mutual fund to a global equity fund. viewtopic.php?t=255006 I would have pretty upset if I had money in that fund and they completely changed strategies on me.
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Re: ETFs changing indexes is common?

Post by alex_686 »

Tyler9000 wrote: Tue Sep 20, 2022 9:20 am Vanguard has changed index providers several times over the years. I wouldn’t say the real-world impact is that noticeable, but it’s not uncommon.

On the more extreme end, one of the more egregious changes I’ve seen was when Vanguard changed a precious metals mutual fund to a global equity fund. viewtopic.php?t=255006 I would have pretty upset if I had money in that fund and they completely changed strategies on me.
I will modestly disagree.

It is far cheaper to repurpose a small failing mutual fund then it is to launch a whole new fund. As somebody who has asked operations when this is happened you can't imagine how much grief it solves. And this is counting the grief that goes into informing the current shareholders of the upcoming change.
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Re: ETFs changing indexes is common?

Post by vineviz »

the_wiki wrote: Tue Sep 20, 2022 8:46 am I understand it probably doesn't make a real difference swapping to a similar index. But it just means that manager risk is still not zero, even when picking index funds. Whether it is the index or index methodology that changes.
Yep.

Every investment portfolio has a manager, and whenever there is a manager there is manager risk.

Just always remember that the most dangerous manager is you.

I mean, not you personally. Every investor's biggest danger is their own behavior.
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Re: ETFs changing indexes is common?

Post by Tyler9000 »

alex_686 wrote: Tue Sep 20, 2022 9:27 am It is far cheaper to repurpose a small failing mutual fund then it is to launch a whole new fund. As somebody who has asked operations when this is happened you can't imagine how much grief it solves. And this is counting the grief that goes into informing the current shareholders of the upcoming change.
Sure -- I can see how it's far cheaper to the fund provider to repurpose an old fund than to start a new one. But unless current shareholders can sell their shares tax-free, it can be very expensive to exit an investment strategy they never chose in the first place. So my issue is mostly with the appearance of a bait-and-switch that benefits the fund more than the shareholders.
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Re: ETFs changing indexes is common?

Post by anon_investor »

Tyler9000 wrote: Tue Sep 20, 2022 9:20 am Vanguard has changed index providers several times over the years. I wouldn’t say the real-world impact is that noticeable, but it’s not uncommon.

On the more extreme end, one of the more egregious changes I’ve seen was when Vanguard changed a precious metals mutual fund to a global equity fund. viewtopic.php?t=255006 I would have pretty upset if I had money in that fund and they completely changed strategies on me.
A year or so ago Vanguard changed the index for VIGI (Vanguard International Dividend Appreciation Index ETF) and there was a really nasty year end capital gains distribution.

At the same time Vanguard also changed the index for the US version, VIG (Vanguard Dividend Appreciation Index ETF) and there was no capital gains distribution.
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Re: ETFs changing indexes is common?

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alex_686 wrote: Tue Sep 20, 2022 8:08 am I can’t think of any ETFs that have changed their index. Note, I am not counting the times when the actual index changed.
Here is an example: ETFs can fundamentally change

In 2014, iShares changed the ETF IFSM, tracking the FTSE International Small-Cap Index, to IEUS, tracking the MSCI Europe Small-Cap Index, a different asset class. This would not be a problem in an IRA, as you could switch to iShares' other small-cap ETF SCZ. But if you held IFSM in a taxable account, you had to either keep a fundamentally different fund or pay a capital-gains tax to switch.
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Re: ETFs changing indexes is common?

Post by Gaston »

sycamore wrote: Tue Sep 20, 2022 7:25 am At least for Vanguard it seems they've settled on a long-term index provider CRSP. The main reasons they switched to CRSP (as I recall) were lower index licensing costs, and reduced trading costs because of how index changes are managed. Assuming those costs are about as low as possible now, there's less incentive to switch.
I recall Vanguard also saying that the move to CRSP indices helped them mitigate front-running as stocks move into / out of an index. But I don’t understand how the design of a particular index helps with this situation.
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Re: ETFs changing indexes is common?

Post by Northern Flicker »

alex_686 wrote: Tue Sep 20, 2022 8:08 am I can’t think of any ETFs that have changed their index.
VBR changed from the MSCI US Small Cap Value Index to a CRSP index on April 16, 2013.

VEA changed from a large/mid-cap index that excluded equities from Canada and S. Korea to an all-cap index that included both Canadian and Korean equities. It went through several index changes to make the transition. From the Vanguard site, it tracked:

The MSCI EAFE Index through May 28, 2013; FTSE Developed ex North America Index through December 20, 2015; the FTSE Developed All Cap ex US Transition Index through May 31, 2016; and the FTSE Developed All Cap ex US Index thereafter.

There are others. For better or for worse, I think Vanguard has changed the indices tracked by their index funds with greater frequency than has iShares, State Street, Fidelity, or Schwab. My view is that it creates shorter term timing risk, but the changes are intended to reap long term benefits. The changes generally have been either to lower cost, improve diversification, or both.
Last edited by Northern Flicker on Wed Sep 21, 2022 5:26 pm, edited 2 times in total.
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Re: ETFs changing indexes is common?

Post by exodusNH »

Gaston wrote: Tue Sep 20, 2022 10:22 pm
sycamore wrote: Tue Sep 20, 2022 7:25 am At least for Vanguard it seems they've settled on a long-term index provider CRSP. The main reasons they switched to CRSP (as I recall) were lower index licensing costs, and reduced trading costs because of how index changes are managed. Assuming those costs are about as low as possible now, there's less incentive to switch.
I recall Vanguard also saying that the move to CRSP indices helped them mitigate front-running as stocks move into / out of an index. But I don’t understand how the design of a particular index helps with this situation.
From https://www.crsp.org/files/JOI_CRSP_Index_Article.pdf
The CRSP Indexes also address turnover costs associated with front-running. Reconstitution is a fairly predictable process, and
several leading indexes see front-running by active managers looking to trade securities transitioning into or out of the index ahead of passive managers who must make these trades. We randomize the pricing date during reconstitution, which alleviates front-running by making the inclusion/exclusion of marginal securities in a specific index harder to predict. The randomization itself follows a transparent algorithm - it should preclude manipulation of index membership without introducing any methodological opacity.
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Re: ETFs changing indexes is common?

Post by alex_686 »

Gaston wrote: Tue Sep 20, 2022 10:22 pmBut I don’t understand how the design of a particular index helps with this situation.
The S&P is a very popular index with many funds either directly or indirectly tracking them. It is like wal-mart on Black Friday - lots of people trying to get into one door.people get crushed when changes are made. Well, maybe not. Vast exaggeration. There is very little of that these days.

Nobody uses CRSP except Vanguard. No crush of trades as everyone tries to reconstitute the index on the same day.
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Re: ETFs changing indexes is common?

Post by Gaston »

exodusNH wrote: Tue Sep 20, 2022 11:13 pm From https://www.crsp.org/files/JOI_CRSP_Index_Article.pdf
The CRSP Indexes also address turnover costs associated with front-running. Reconstitution is a fairly predictable process, and
several leading indexes see front-running by active managers looking to trade securities transitioning into or out of the index ahead of passive managers who must make these trades. We randomize the pricing date during reconstitution, which alleviates front-running by making the inclusion/exclusion of marginal securities in a specific index harder to predict. The randomization itself follows a transparent algorithm - it should preclude manipulation of index membership without introducing any methodological opacity.
Thank you. Very interesting article. I note that CRSP says their approach alleviates front-running in marginal securities. I guess that means that the addition / removal of a Tesla-sized company is still an issue. What do you think?
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Re: ETFs changing indexes is common?

Post by Northern Flicker »

In this context, marginal means securities at the margin of the index, i.e. near the boundary (on either side). It has nothing to do with the size of the company, other than the fact that it is not very common for companies the size of Tesla to be at the margin. But it does happen-- Google being added to the S&P500 was a similar event.

CRSP does more than just randomize the price date. The indices are established by total capitalization as a percentage of market cap rather than by number of companies. And my understanding is that they have buffer bands that are randomized up to 5%. This makes it even hard to predict what changes will happen-- never mind that the pricing date of the change also is randomized.

As far as Tesla is concerned, the CRSP large cap index holds more market cap than the S&P500 and had included Tesla well before the S&P500. There isn't nearly the level of assets indexed to the CRSP large cap index to attract the interest of front-runners, so the CRSP index maintenance procedures may not have been tested with Tesla.

As far as the event adding Tesla to the S&P500 was concerned, to the extent that front-running S&P500 funds even was an issue, the CRSP large cap index already had included Tesla, so it de facto front-runned both the front-runners and the S&P500 index change. The CRSP index holds the margins on both sides of the boundary of the S&P500, so S&P500 changes are a non-event for that index generally.
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Re: ETFs changing indexes is common?

Post by nisiprius »

alex_686 wrote: Tue Sep 20, 2022 8:08 am I can’t think of any ETFs that have changed their index...
ITOT changed from tracking the S&P 1500 index to tracking the S&P Total US Stock Market index.
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Re: ETFs changing indexes is common?

Post by Northern Flicker »

nisiprius wrote: Wed Sep 21, 2022 5:57 pm
alex_686 wrote: Tue Sep 20, 2022 8:08 am I can’t think of any ETFs that have changed their index...
ITOT changed from tracking the S&P 1500 index to tracking the S&P Total US Stock Market index.
Technically, yes. But I believe that it tracked the S&P1500 when it was a new fund as a way of avoiding smaller volume holdings of microcaps or smaller smallcaps until it had enough AUM to track the broader market in a cost effective manner.

Another way to look at it is that they would use sampling at that stage and the SP1500 made that easier to do with less tracking error risk while the fund was still growing.

I think the change to the total market index was planned from the start.
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Re: ETFs changing indexes is common?

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Northern Flicker wrote: Wed Sep 21, 2022 5:17 pm CRSP does more than just randomize the price date. The indices are established by total capitalization as a percentage of market cap rather than by number of companies. And my understanding is that they have buffer bands that are randomized up to 5%. This makes it even hard to predict what changes will happen-- never mind that the pricing date of the change also is randomized.
The buffer bands aren't randomized; they are just ranges that allow funds to reduce turnover. If a stock is in the buffer zone covering the smallest mid-caps and largest small-caps, it will stay in whichever one of the mid-cap and small-cap indexes it was previously in; only if it moves beyond the buffer will it be dropped from one index and added to the other. The S&P gets a similar reduction in turnover because the committee determines moves; the smallest stocks in the S&P Mid-Cap 400 are smaller than the largest stocks in the S&P Small-Cap 600.
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Re: ETFs changing indexes is common?

Post by Northern Flicker »

grabiner wrote: Wed Sep 21, 2022 7:49 pm
Northern Flicker wrote: Wed Sep 21, 2022 5:17 pm CRSP does more than just randomize the price date. The indices are established by total capitalization as a percentage of market cap rather than by number of companies. And my understanding is that they have buffer bands that are randomized up to 5%. This makes it even hard to predict what changes will happen-- never mind that the pricing date of the change also is randomized.
The buffer bands aren't randomized; they are just ranges that allow funds to reduce turnover. If a stock is in the buffer zone covering the smallest mid-caps and largest small-caps, it will stay in whichever one of the mid-cap and small-cap indexes it was previously in; only if it moves beyond the buffer will it be dropped from one index and added to the other. The S&P gets a similar reduction in turnover because the committee determines moves; the smallest stocks in the S&P Mid-Cap 400 are smaller than the largest stocks in the S&P Small-Cap 600.
You are correct. I thought I had read that some randomization was applied to the width of the bands, but the index methodology document clearly states that constant width bands are used:

https://www.crsp.org/files/equity-index ... -guide.pdf

I don't have concerns about the S&P base indices (SP500, SP400, SP600), but I am not enamored with the index maintenance process for the S&P style indices (such as the S&P 600 Small-Cap Value index).
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Re: ETFs changing indexes is common?

Post by alex_686 »

nisiprius wrote: Wed Sep 21, 2022 5:57 pm
alex_686 wrote: Tue Sep 20, 2022 8:08 am I can’t think of any ETFs that have changed their index...
ITOT changed from tracking the S&P 1500 index to tracking the S&P Total US Stock Market index.
So let me modestly take the other side.

To put things in context, I know a fair bit about switching indexes and fund mandates from my time working with mutual funds. First hand knowledge. Relatively straightforward. Fair number of hoops to jump through, including shareholder buy in. So I know the regulation side decently. I am speculating about ETFs. The regulation side would be the same. I don't think the mechanics would be.

At a certain size and volume it makes sense for options to be offered on those ETFs. You can do a fair number of cool things that the Authorized Participants (APs) can do with ETF options and index futures to make the trading of ETFs for efficient. i.e., reduce the NAV premium/discount spread, reduce the bid/ask spread. Note, the AP and option market are outside of the fund sponsor's domain.

That is we have independent parties building a infrastructure around the ETF product, supporting it. You don't have this with mutual funds. Changing the index would throw a spanner into this ETF machinery. There is no real clean way of doing this. Basically you would be dumping risk and costs onto your partners and in general alienating them.

This is not a hard "No", as it can't be done. But the bigger the ETF becomes the harder it would be to do the switch.
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Re: ETFs changing indexes is common?

Post by Northern Flicker »

VBR and VEA were not small funds when Vanguard changed the indices they track.

On the one hand, changing indices requires changes by the AP's, who have to adjust their inventory to be prepared to move baskets of stocks with a different makeup. But I think the large index fund managers generate enough business for the AP's that most will fall in line. I imagine that the market makers who play ball with the change would be delighted to take over the market share of any who would choose not to do so.
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Re: ETFs changing indexes is common?

Post by nisiprius »

One of the nice things about the kinds of indexes and index funds favored by Bogleheads is that when competent index providers try to measure "the total return of the US stock market," despite the details of what is going on under the hood, they get virtually the same answer.

That's not true for indexes tracking smaller parts of the market where there is more judgement and arbitrary decisions e.g. about whether South Korea is an emerging or a developed market make larger differences in the portfolio of constituents and greater differences in the actual performance of the index.
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