Vanguard Fires MSCI; Should You Fire Vanguard?

Tickers in this article: BLK VWO
NEW YORK ( TheStreet) -- Vanguard has fired MSCI. Twenty-two Vanguard index funds that were tracking stock indexes from MSCI will soon be following FTSE and CRSP indexes.

What does this mean to you? Should you be concerned? Should you fire Vanguard as your ETF vendor? Read on for answers.

Background: On Oct. 2, Vanguard announced a huge change. Over a period of six months, 22 Vanguard index funds will change the benchmarks used to measure their performance. Six international stock funds will transition from familiar MSCI indexes to established, yet less popular FTSE benchmarks.

Additionally, 16 U.S. stock funds will move to newly developed benchmarks from the University of Chicago's Center for Research in Security Prices, or CRSP. These changes will apply to all the funds' share classes, including exchange-traded funds (ETFs). The Vanguard announcement linked above has a list of affected funds.

The changes will take place gradually during the first six months of 2013, although Vanguard does not intend to reveal the schedules for individual funds. An added twist for the Vanguard Emerging Markets ETF (VWO) is it will be tracking a specially developed transition index during that time. Additional information on this process is available in the FTSE Transition overview (pdf).

Vanguard's ETFs are structured as an additional share class to their mutual funds. The affected funds are typically available in three share classes: Investor, Admiral and ETF. Therefore, up to 66 fund tickers may be affected by these changes.

According to Vanguard, assets in these funds total about $537 billion. This is not a trivial change.

What does this mean to you?

The primary implication for investors is to understand that when you choose an ETF, you are also choosing an ETF sponsor/manager and choosing an index. This has always been true to some extent. However, with multiple ETF providers basing their offerings on the same indexes, the choice was previously just a matter of choosing the ETF provider.

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When building portfolios based on multiple index providers, investors need to be cognizant of overlap and underlap. The most talked about example of this appears in the international indexes and the classification of South Korea. In the MSCI methodology, South Korea is an "emerging market" while in the FTSE methodology it has "developed market" status.

You can argue about which one is correct or better, but that misses the point. When Vanguard and BlackRock's (BLK) iShares were both following MSCI benchmarks, you could easily choose one vendor for your emerging markets exposure and the other for developed markets exposure. Since they had the same benchmark, you did not have to worry about overlap or underlap.

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