Vanguard sector ETFs to reflect GICS changes

Mar 5th, 2018 | By | Category: Equities

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Vanguard is to alter the underlying indices for three of its NYSE-listed sector ETFs to reflect changes to the Global Industry Classification Standards methodology announced by MSCI in November 2017.

Three Vanguard ETFs switch indices to align with MSCI's sector changes

The three Vanguard sector ETFs will begin tracking transition indices in the second quarter of 2018.

The changes are due to affect the Vanguard Telecommunication Services ETF (VOX US), Vanguard Consumer Discretionary ETF (VCR US) and Vanguard Information Technology ETF (VGT US).

Greg Davis, Vanguard chief investment officer, commented, “We’re pleased with MSCI’s changes as we believe the reconstituted benchmarks provide investors with a better representation of the sectors they track. We have determined that these changes and our approach to adopting the new benchmarks are in the best interests of shareholders.”

MSCI, along with GICS co-creator S&P Dow Jones Indices, is seeking to realign the GICS so that companies are classified by the service they provide to consumers rather than the means of delivery.

The announced changes involve the telecommunication services sector being broadened and renamed as communication services. The new sector will include two industry groups, the current telecommunications services industry group in its present form, and media & entertainment.

The telecommunication services industry group will remain in the communication services sector and continue to include providers of telecommunication services and related services. In addition, internet service providers offering internet access to end users will be classified here.

The media & entertainment industry group will move out of the consumer discretionary sector (where it is presently called the media industry group). It will contain three industries: media, entertainment, and interactive media & services.

The media industry will include companies engaged in advertising, broadcasting, cable & satellite and publishing. The entertainment industry will contain companies involved in producing and selling entertainment products and services. It will now also include online entertainment streaming companies as well companies producing video games and mobile gaming applications. The interactive media & services industry will include companies engaged in content and information creation or distribution through proprietary platforms, where revenue is derived primarily from pay-per-click advertising. This will include search engines, social media and networking platforms, and online review companies.

Other changes include the internet & direct marketing retail sub-industry in the consumer discretionary sector being updated to include companies providing online marketplaces for consumer products and services. The sub-industry will include e-commerce companies regardless of whether they hold inventory, a change that will move companies such as eBay from information technology to consumer discretionary.

The final change will see the creation of a new sub-industry called internet services & infrastructure in the services industry. This sub-industry will include companies providing services and infrastructure for the internet industry including data centres, cloud networking & storage infrastructure, and web hosting services.

Beginning in the second quarter of 2018, the funds will track custom transition indices. According to Vanguard’s Equity Index Group who will manage the transition, these interim indices are designed to ensure the changes are implemented in the most transparent, cost-efficient way for the funds’ investors, while also reducing tracking error and mitigating market impact.

The funds will track these custom indices until MSCI’s index changes are complete (currently due after the close of business on 28 September 2018), at which time the funds will track the applicable MSCI indices.

The transition to the new indices is not expected to result in material capital gains distributions to shareholders or changes to the ETFs’ expense ratios.

Vanguard offers 11 sector index ETFs in total. The other funds in the suite include the Vanguard Consumer Staples ETF (VDC US), Vanguard Energy ETF (VDE US), Vanguard Financials ETF (VFH US), Vanguard Health Care ETF (VHT US), Vanguard Industrials ETF (VIS US), Vanguard Materials ETF (VAW US), Vanguard REIT (VNQ US) and Vanguard Utilities ETF (VPU US).

Each fund has an expense ratio of 0.10% except the REIT ETF (VNQ) which costs 0.12%. VNQ is also the largest fund in the suite with over $32 billion in assets under management.

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