The best-selling ETF since the end of September is iShares MSCI Emerging Markets (NYSEArca: EEM) with over $2 billion of inflows. The developing market ETF has been gobbling up cash after a rival fund managed by Vanguard announced it was dropping its MSCI tracking index.

EEM, which is sponsored by BlackRock (NYSE: BLK), has gathered $2.2 billion since Sept. 30,according to flow data from IndexUniverse.

Since then, Vanguard MSCI Emerging Markets (NYSEArca: VWO) has seen outflows of $728 million. In early October, Vanguard said it planned to transition its international equity ETFs to FTSE indices as it drops MSCI (NYSE: MSCI) benchmarks. The move will allow Vanguard to lower ETF expense ratios due to cheaper index licensing fees. [Vanguard Index Change Sets Emerging Market ETF Showdown]

Some fund managers benchmarked to MSCI indices have expressed reservations about the index swap, the Financial Times reports. Others are concerned the move may lead to negative tax consequences and costs.

Vanguard points out that its emerging market fund, VWO, offers cost savings for investors and advisors. VWO has an expense ratio of 0.2% compared with 0.67% for the iShares ETF. BlackRock recently launched iShares Core MSCI Emerging Markets ETF (NYSEArca: IEMG), which has an expense ratio of 0.18%. [Emerging Market ETF Battle: Vanguard vs. iShares]

Vanguard thinks the FTSE indices offer broad exposure to international markets, and expects long-term licensing arrangements with FTSE will enable it to deliver considerable expense saving over time. [Vanguard Emerging Market ETF Index Switch: What Investors Should Know]

“At the same time, we understand that for some investors this change may be problematic. FTSE classifies South Korea as a developed market, while MSCI classifies it as an emerging market,” says Fran Kinniry, a principal in Vanguard Investment Strategy Group. “It’s a dilemma that’s led some investors to reevaluate their holding of Vanguard Emerging Markets Stock Index Fund and ETF (VWO).” [Doing the Math on International ETFs]

In the FT story, Kinniry said Vanguard anticipated inflows might slow in the short term but believed the index switch would benefit investors over the long run. “The switch will solidify our cost leadership in indexing over the next decade and beyond,” he said in the report.

Dan Caplinger at the Motley Fool on Wednesday reported the Vanguard index change has created a controversial situation.

“After creating a huge success with its Vanguard MSCI Emerging Markets ETF (VWO), the company decided to make a money-saving move that has some of its biggest customers crying foul — and putting their money where their mouths are,” he writes.

“Vanguard is doing what it can to protect its shareholders by not disclosing exactly when the changes will start taking place,” Caplinger added. “But the more important question facing the fund is whether the move will cause a massive shareholder defection. After having worked so hard to dethrone the iShares emerging market ETF, Vanguard certainly doesn’t want to give back the title.”

Full disclosure: Tom Lydon’s clients own EEM.

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