The Vanguard Emerging Markets Stock Index fund has moved to the FTSE as its main benchmark. Following the move, the FTSE Group announced the retirement of its Emerging Transition Index in favour of the new Emerging Markets Benchmark.
The Vanguard Fund is valued at more than $70 billion and it, along with the related ETF, now tracks the FTSE Emerging Index, which is an index used by investors from all over the world to benchmark equities in the emerging markets.
The transition to what is essentially a FTSE ETF involved the movement of six different international Vanguard Funds, which are worth in excess of $209 billion, to the FTSE indices. The move was first announced in October 2012 and after the completion of the move there was a total of $241 billion in Vanguard assets tracking the FTSE’s benchmarks. Around 40% of those assets relate to ETFs.
Progress Since January
Work on transferring the fund began in January 2012. The move is one of the biggest and most complex benchmark transitions to take place in the modern markets. Before the move, Vanguard funds tracked a wide range of emerging markets, with a substantial skew towards South Korean funds. The FTSE’s classification system differs from the tracking used by Vanguard funds and considers Korea to be a developed market. Handling this difference proved an interesting challenge.
To prevent a massive shock to the markets, in preparation for the move the system introduced a gradual weighting system. Old Vanguard funds had a 15% weighting towards Korea and over time that weighting was reduced to zero. Meanwhile, the FTSE released the index constituents and weighting data for investors so that they could track the changes to the market during the transition period.
The World’s Largest ETF for Emerging Markets
The move took twenty-six weeks and investors followed the markets until the changes to the funds matched those of the FTSE Emerging Markets Index, which they were being moved over to. The move went quite smoothly and now investors are all on the FTSE Emerging Markets ETF together. The ETF is passively managed and all assets and stocks included in the index are invested to spread risk and provide a relative level of stability.
Countries included in the Emerging Markets benchmark include Brazil, India, Russia, Taiwan, China and South Africa. While returns are not guaranteed, the market has gained more than 7.7% since inception. The index has seen poor performance over the year to date, with a fall in value of 10.79%. However this can be attributed to a generally underperforming economy worldwide. There is always some risk to investing in emerging markets, but investing in an ETF can help to spread that risk.
The Emerging Markets Index is heavily skewed towards the financial sector. Other sectors in the index include energy, information technology, materials, consumer staples and telecommunication services. There are some other sectors which account for a smaller percentage of the benchmark total, such as utilities and health care. The weightings for those sectors may change if the market moves significantly.