“Several concerns arise when trading such a large position,” Wiener added. “The first is taxes. Although Vanguard does not expect its trading to generate capital gains, the potential remains. The second is tracking error, or the risk that the fund’s performance fails to match that of either index.”
‘Seal of approval’
In Vanguard’s U.S. stock ETFs, it is moving to CRSP indices.
“While CRSP data is well-known among academic researchers, this is their first foray into actual index product development,” Wiener observed. “Given that this move instantly gives CRSP recognition and the Vanguard ‘seal of approval,’ I wonder just how good of a deal Vanguard was able to cut? I’ve spoken to some industry insiders who agree that Vanguard may actually have licensed the CRSP indexes for nothing.”
At the end of September, Vanguard managed 64 ETFs with total assets of $230.3 billion, according to industry data from BlackRock. Vanguard is the third-largest ETF provider but is leading 2012 with inflows of $42.4 billion through the end of the third quarter.
Longtime Vanguard watcher Wiener says investors shouldn’t be losing any sleep over the benchmark changes because the indices have performed similarly over time.
“Vanguard isn’t playing favorites in the index space and doesn’t see any one provider as delivering a premium product worth paying up for— it’s all about costs,” he said. “If this move flows through to lower expense ratios, those savings will accrue to investors’ bottom line. And that’s something all investors can appreciate.”
Full disclosure: Tom Lydon’s clients own VWO.