Vanguard Index Switch Sets Emerging Market ETF Showdown | ETF Trends

There are several moving parts to Vanguard’s announcement Tuesday that it’s changing the tracking benchmarks for several of its index funds, but one of the most interesting subplots involves its emerging markets ETF.

Vanguard MSCI Emerging Markets (NYSEArca: VWO) will transition to the FTSE Emerging Index at some point next year.

In terms of gathering assets, VWO has been crushing iShares MSCI Emerging Markets (NYSEArca: EEM) in a head-to-head match-up in recent years. They track the same MSCI index but the Vanguard ETF plans to shift to a FTSE benchmark. [Vanguard Changing Indices]

The Vanguard emerging market fund, VWO, is the best-selling ETF in 2012 with inflows of $11.5 billion, according to Index Universe data. EEM has gathered $1.6 billion.

Investors have been favoring the lower-cost Vanguard ETF for emerging markets. VWO has an expense ratio of 0.2% compared with 0.67% for the iShares ETF.

Yet Vanguard moving to a different index means that investors won’t compare the ETFs on costs alone anymore.

Also, many pension funds and institutional investors use MSCI indices for their international benchmarks. That may cause some large investors to drop the reconstituted Vanguard ETFs for iShares funds that follow MSCI’s international benchmarks.