Vanguard Emerging Market ETF Index Switch: What Investors Should Know

The Vanguard MSCI Emerging Markets ETF (NYSEArca: VWO) is the third largest exchange traded fund on the market, with $38 billion in assets. The recent announcement that Vanguard will be making an index change to FTSE has investors pondering their choices.

“In early October, Vanguard announced that it is changing the fund’s benchmark from the MSCI Emerging Markets Index to the FTSE Emerging Index, and the most significant difference between the indexes is that South Korean equities (which currently account for 15% of the fund) are not part of the FTSE Index,” Patricia Oey wrote for Morningstar. [Emerging Market ETF Battle: Vanguard VS iShares]

The question goes much deeper than omitting South Korea from the index. Investors must also question if a cap-weighted approach is the best way to tap into emerging markets. Morningstar suggests that those investors who are able to walk away from traditional cap-weighted indexing should consider doing so for emerging markets exposure.

For one, since many emerging market large-cap companies are government-owned, economic and political interests come first, not the shareholder, reports Oey. Most private businesses are small or mid-cap sized, and therefore, are representative of consumption levels. Most market-cap weighted indices omit these companies and lose out on the growth potential. [iShares Emerging Market ETF Sees Inflow After Vanguard Index Swap]