Vanguard switches benchmarks on ten funds to steer clear of double-taxation

The Vanguard Group Inc. today changed the benchmarks for ten stock sector index mutual funds and corresponding exchange-traded funds from their old MSCI indexes to new MSCI 25/50 benchmarks. Those benchmarks are designed to meet IRS standards for registered investment companies. A fund that does not meet the IRS standards is subject to double taxation. To qualify as a registered investment company, a fund must have no more than 25% of its assets in securities from a single issuer and no more than 50% of its assets in securities of issuers that individually represent 5% or more of the fund’s assets. “Historically, the MSCI Consumer Staples Index, the MSCI Energy Index and the MSCI Telecommunications Services Index have had significant concentration in a few issuers, which has kept them from meeting the diversification standards under the code,” Vanguard spokeswoman Rebecca Katz wrote in an e-mail. She added that to ensure compliance with the code’s diversification standards, "the funds tracking these indexes have periodically had to underweight certain larger companies and overweight smaller companies relative to the relevant index weightings.” The MSCI 25/50 Indexes will help ensure that the Vanguard funds adhere to tax code limitations and more closely track their target benchmarks, while continuing to offer exposure to their relevant market segments. The switch is similar to Vanguard’s decision last year to change the benchmarks of five bond funds to Barclays Capital float-adjusted bond indexes, replacing the former Barclays indexes. The float-adjusted benchmarks better represent actual liquidity in the marketplace and should help insulate Vanguard's bond index funds from securities whose prices may be distorted by significant reduction in supply as a result of Federal Reserve buybacks, according to a statement on Vanguard’s website.