Recent Vanguard Index Fund Benchmark Changes = Lower Costs

Recently, Vanguard has made some big moves in the index fund space. Well, they were big for people in the business, but for individual investors it basically boiled down to some simple good news: even lower costs, which happily means larger numbers on my monthly statements.

In October 2012, Vanguard announced that they would be changing the benchmarks on 22 of their index funds from MSCI indices to either FTSE (international) or CRSP (domestic) indices. Essentially, companies like S&P (S&P 500) and MSCI are the “brand names” of the indexing world. However, creating an investable market-cap weighted index has basically become a commodity, so why not go “generic” where available? FTSE is part of a publicly traded company, but CRSP is short for University of Chicago’s Center for Research in Security Prices which is run as a non-profit.

Basically, MSCI wanted too much in licensing fees, so Vanguard dropped them. Remember that with Vanguard’s client-owned structure, the savings goes to the investor and not to shareholders or private owners. This move should result in lower expense ratios in the affected funds as well as the popular Target Retirement 20XX and LifeStrategy funds. Vanguard is taking the transition slowly over several months in order to minimize any capital gains, front-running, or market impact costs. Here is a list of all the affected funds and the new benchmarks. Notable changes include:

  • Vanguard Total Stock Market Index Fund (VTSMX, VTSAX, VTI) will now track the CRSP US Total Market Index. It shouldn’t change significantly, but the new CRSP index does include more micro-cap stock exposure.
  • Vanguard Total International Stock Index (VGTSX, VTIAX, VXUS) will now track the FTSE Global All Cap ex US Index. Here is another nice overview on the Rick Ferri Forbes blog, but basically there will only be slight changes.
  • Emerging Markets Stock Index Fund (VEIEX, VEMAX, VWO) will now track the FTSE Emerging Index. The big change here is that FTSE has South Korea as a Developed market, whereas MSCI still has South Korea as a Emerging market. South Korean stocks were 15% of the MSCI-based ETF, so the new ETF should look a little different. This was going to happen sooner or later, anyway.

Bottom line: Vanguard disrupted the industry again, and others may have to follow eventually. Vanguard already has the asset size and client-owned structure that gives them the ability to maintain the lowest costs in the industry. Other providers may match or even beat their expense ratios, but they are doing it as a loss-leader and hoping to make it up elsewhere. Like milk or orange juice at the grocery store, this means whatever is on sale today may go up in price next week (or year, or decade). The difference is that when it comes to long-term investing, over time you will (hopefully) accumulate significant capital gains and selling them prematurely will results in a tax hit. I don’t want to have to switch investments later on in the game.


  1. I have my Roth IRA funds invested in some the admiral class funds affected so I’m happy to realize the savings on already low expenses. I’m also interested to see how the index changes affect fund performance.

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