Vanguard recently announced they will be changing the index benchmarks tracked by several of their exchange-traded funds (ETFs). The changes, which will occur gradually, are being made to reduce internal fund costs, thus increasing the amount of returns which ends up in investors’ pockets. Here is an overview of the changes and the benefits investors can expect:
What is changing?
Vanguard’s U.S. stock ETFs will begin tracking the Center for Research in Securities Prices (CRSP) indices instead of Morgan Stanley Capital International (MSCI) indices. The reason for the change is savings on fees. Index funds and ETFs pay licensing fees to the providers of the index benchmarks they track. These costs have been increasing across the industry and now represent a significant portion of what investors pay to hold index funds and ETFs. Vanguard has negotiated more favorable licensing arrangements with CSRP, which should result in lower expense ratios for their ETFs over time—a real benefit for fund shareholders.
Who is CRSP?
Like Vanguard, the Center for Research in Securities Prices (CRSP) is a pioneer it its field. CSRP was established at the University of Chicago in 1960, a time when no source for historical stock market data existed. CRSP was founded to create the first comprehensive database of prices, dividends, and rates of return for all stocks on the New York Stock Exchange back to 1926. They accomplished the labor-intensive task in 1964, allowing investors for the first time ever to compare historical returns of stocks to one another and to the broad market. Today, 80% of academic research focused on stocks or stock markets uses CSRP as a source due to the accuracy and completeness of their information.
How does this impact Vista portfolios?
The changes will impact a number of Vanguard funds and ETFs. In general, MSCI and CSRP indices cover the same market segments; consequently, changes to fund holdings are not expected to be dramatic and no resulting realized capital gain distributions are expected. The main effect of the index changes, which investors can expect to enjoy over time, is the benefit of lower fund expenses.
Editor’s Note: This article was originally penned by our late colleague, Gordie Gorsuch, whose timeless wisdom lives on in Vista’s investment philosophy.