Vanguard’s giant emerging markets ETF begins transition to FTSE index

Jan 10th, 2013 | By | Category: ETF and Index News

Following last year’s announcement, Vanguard has begun the transition process that will see the Vanguard MSCI Emerging Markets ETF (VWO), which up until now has tracked the MSCI Emerging Markets Index, switch to its new index, the FTSE Emerging Index.

Vanguard’s giant emerging markets ETF (VWO) begins transition to FTSE index

Vanguard’s giant emerging markets ETF (VWO) has begun the transition to its new FTSE index.

Due to the size of the fund (approximately $62 billion in assets), the fund will initially track a specially designed transition index as an interim step towards ultimately tracking the FTSE Emerging Index.

The new index and ongoing relationship with FTSE is expected to provide cost certainty and savings over time for investors.

In connection with the index change, the name of the fund will change from Vanguard MSCI Emerging Markets ETF to Vanguard FTSE Emerging Markets ETF. The ETF’s ticker symbol (VWO) will not change.

The fund’s eventual new index, the FTSE Emerging Index, is a market capitalization-weighted index providing comprehensive and diversified exposure to 22 emerging market countries. Constituent countries range from the larger BRIC (Brazil, Russia, India, and China) countries, which account for 49.23% of the index, to smaller markets such as Morocco and Pakistan, which account for 0.04% and 0.12% respectively.

The FTSE index is generally comparable to the MSCI index apart from one key difference: the classification of South Korea. FTSE classifies South Korea as a developed market, whereas MSCI still categorises it as an emerging market.

FTSE justifies South Korea’s developed market status by highlighting, among other things, that the country is a member of the OECD and G20, and is classified as a high-income developed country with a developed market by the World Bank.

This key difference makes it necessary for the fund to sell down its South Korean exposure and invest the proceeds in the other markets in the index. To minimise market impact during the transition, the fund will follow the specially designed FTSE Emerging Transition Index for approximately six months.

During this six-month period all South Korean companies will gradually be removed and the index constituents and weightings will be aligned with the official FTSE Emerging Index. This extended transition will reduce the costs associated with trading large amounts of securities in a short period.

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