Vanguard index shift signals leap in fee war

OCT 17, 2012
A new front has opened in the fee war between ETF providers: which firms they use to supply underlying benchmark indexes for the funds. In another effort to lower licensing fees, The Vanguard Group Inc. said last Tuesday that it will drop MSCI Inc. as the index provider for 22 of its index and exchange-traded funds in favor of FTSE Group and The Center for Research in Securities Prices. A total of $537 billion in assets under management will be affected by the shift. Among the funds changing benchmarks is the $57 billion Vanguard Emerging Markets ETF (VWO) and the $23 billion Vanguard Total Stock Market ETF (VTI).

FEES PUSH EXPENSE RATIOS

“One of the trends we've seen is that index licensing fees have been taking up more and more of the expense ratio over time,” said Joel Dickson, an ETF strategist at Vanguard. “We thought it was valuable to be able to get better cost certainty and longer agreements,” he said. “Over time, as assets grow, those savings can be passed on to investors.” Mr. Dickson declined to disclose the exact change in fees or the length of the contracts. “We are disappointed that Vanguard will no longer use our indexes as the basis for these exchange-traded funds,” Baer Pettit, head of MSCI's index business, said in a statement. “The ETF market in North America is competitive, and as it evolves, we will work with those ETF providers who seek to utilize independent, well-respected and high-quality equity indices in their products.”

BLACKROCK, SCHWAB

Fees have come into focus lately as BlackRock Inc., the largest provider of ETFs, and The Charles Schwab Corp. said recently that they would cut fees on their ETFs, largely to compete with Vanguard. This year through Sept. 30, Vanguard, thanks to its focus on low costs, attracted nearly $1 of every $3 invested. The changes in benchmarks and the assumed ability to lower fees isn't a direct response to the recent fee cuts by rivals, Mr. Dickson said. “We're constantly looking at the different factors that impact costs in a portfolio,” he said. The Vanguard emerging-markets fund, along with six other international equity funds, will begin tracking FTSE Group indexes sometime early next year. The total stock market fund, and 16 other stock and balanced funds, will begin tracking indexes from CSRP, an academic and investment research firm associated with the University of Chicago. Vanguard isn't publicizing the exact date of the changes to avoid firms' front-running the funds as they buy or sell securities to fit the new benchmarks. [email protected] Twitter: @jasonkephart

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