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ETF fee war intensifies as Vanguard swaps indices to cut costs

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ETF fee war intensifies as Vanguard swaps indices to cut costs

Vanguard is planning to change the benchmarks underlying a range of exchange traded funds (ETFs) and mutual funds, to make ‘considerable savings’ for the funds’ shareholders over time.

The firm is set to switch six of its international index funds to FTSE indexes and 16 of its US stock and balanced index funds to new benchmarks developed by the University of Chicago’s Centre for Research in Security Prices (CRSP).

The firm said in an environment where index licensing fees represent a growing portion of the expenses investors have to pay to own index funds and exchange traded funds (ETFs), the switch to benchmarks with lower fees will provide greater cost certainty and savings.

‘The indexes from FTSE and CRSP are well constructed, offer comprehensive coverage of their respective markets, and meet Vanguard’s ‘best practice’ standards for market benchmarks,’ said Vanguard chief investment Officer Gus Sauter.

He added: ‘Equally important, and with our clients’ best interests in mind, we negotiated licensing agreements for these benchmarks that we expect will enable us to deliver significant value to our index fund and ETF shareholders and lower expense ratios over time.’

Vanguard’s focus on low-cost vehicles largely stems from its structure as a client-owned firm.

‘Our structure, along with our ongoing commitment to keep operating costs at the lowest reasonable levels, leads to low expenses that are enduring in nature,’ added Sauter.

Vanguard’s move to the new benchmarks means FTSE will become the third-largest equity exchange-traded index benchmark provider globally, the firm said.

The international ETFs subject to change include the Vanguard MSCI European ETF, MSCI Pacific, MSCI Emerging Market, MSCI EAFE and Total International Stock.

The US domestic ETFs set to transition to CRSP benchmarks include the Mega Cap 300 ETF, Mega Cap 300 Growth, Small Cap ETF, and Mid-Cap Value ETF, among others.

Analysts at Morgan Stanley said: ‘This change will affect both mutual funds and ETFs; Vanguard has a very unique structure where the mutual funds and ETFs are just share clas1ses of larger fund.’

They added: ‘So what does this mean for clients who own Vanguard ETFs? One of the largest differences is going to be based on MSCI EM.

‘MSCI includes Korea as an emerging market, whereas FTSE does not, and Korea is 15% of MSCI EM.’

The move will also compound the ongoing price war between providers in the States, which UK-based investors are hoping will influence the domestic market, especially since the entrance of Vanguard ETFs into the UK earlier this year.

BlackRock recently said it is reviewing its pricing structure of ETFs as cost pressure mounts, although it is believed this will largely affect the firm’s US range.

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