Vanguard Index Funds Moving From S&P To MSCI


Thinks s/he gets paid by the post
Feb 8, 2003
Nomadic in the Rockies
Edit: The profanity filter strikes again. Market-watch is printing as Markethingych. (Took me 5 minutes to figure out why the filter modified it!)
I don't closely track my investments, and this startled me.

Vanguard is changing the benchmark index (link to CBS Marketwatch story) for several of their funds from S&P indexes to the new MSCI indexes:

The specific funds are Value Index (VIVAX), Growth Index (VIGRX), Mid Capitalization Index (VIMSX), Small Cap Index (NAESX), Small Cap Value Index (VISVX) and Small Cap Growth Index (VISGX).

The biggie Index 500 (VFINX) will still be based on the S&P 500, though, and my Extended Market Index Fund (VEXMX) is still toal market minus the S&P 500, so luckily my two main index funds aren't changing.

This Marketwatch article (link) offers a different angle on the change, especially how Vanguard is mad at Standard and Poor over not being able to sell ETFs based on the S&P 500 without paying more licensing fees.

I'm in index funds for stability; if I was in one of the changing funds I'd be wound up about what to do and worrying about the other shareholders suddenly pulling out large sums of money and killing my NAV, or if I were in non tax sheltered accounts then I'd worry about extra capital gains hits both on the conversion turnover and covering panicky selloffs. But maybe I'm just paranoid and should start investing more conservatively like johngalt. ;)

I found these articles on CBS Marketwatch through Yahoo! Finance. I went to Vanguard's site to find links for this post but couldn't find a related story or press release! Maybe I didn't look in the right places.
The silly filter is SUPPOSED to catch only whole words. Oh well. I deleted all the words now.


My impression is that Vanguard investors have known about this all along. At least it is in their prospectives and that it has been approved by their investors.

The second article is very good about explaining the causes.

"In the spring of 2000 Vanguard got into a year-long legal bout with Standard & Poor's over licensing of its S&P 500 index, the bogey behind Vanguard's 500 Index fund, the largest stock mutual fund in the world."

"...S&P wanted a licensing fee that Vanguard didn't want to pay. Vanguard lost the battle."

"Since then, S&P indexes have lost favor at Vanguard..."

When Vanguard was restricted to Standard & Poor's products, they had no flexibility at all. Now they can participate in defining indices so as to maintain "greater style integrity" and keep costs down via "less turnover than the current batch, providing a slight reduction to taxes and transaction costs."

I do not have any investments in Vanguard. If I did, I would want this kind of thing.

Have fun.

John R.
Here are a couple of links. They are worth reading in their entirety. The first is an interview.

Q: Vanguard is considering switching benchmarks for some of its index funds. How has this changed the outlook for index providers?

A: Index providers probably took notice when the biggest retail index fund provider out there started talking about switching benchmarks. On the other hand, Vanguard's reasons for making the move are sound. In a broad sense, this will force index providers to look into ways to improve their benchmarks. The reason Vanguard is making the switch is because they believe there are indexes that better capture a particular slice of the market. That's a worthwhile endeavor. The S&P/Barra style indexes that Vanguard currently uses define growth and value in a narrow way. Only one criterion is used: price-to-book ratio. There's many other dimensions to look at and consider.

The other link is an April press release from Vanguard.

I hope that these clarify things and that this corrects any mistakes that I have made. I think that the cost issue mentioned earlier is also relevant.

Have fun.

John R.
For those who are not familiar with Vanguard -- the company was founded (I think in about 1971) by John Bogle, who more than anyone else has been an advocate of index investing with minimal charges to investors.

Mr. Bogle was forced to involuntarily retire from Vanguard's Board when he turned 70 (possibly because of a policy that he had started when he was younger)!  But as a concession to the numerous Vanguard shareholders like me who objected to this, the company supports him in conducting ongoing research/advocacy via the "Bogle Center."  His periodic speeches are reproduced on the "Bogle Center" link at the Vanguard Home Page (

One of Mr. Bogle's key observations is that, over time, the performance of all U.S. stock indices "reverts to the mean" -- in other words, becomes virtually the same.  Thus, debating the exact composition of stocks in a sub-index like "small cap growth" is like debating how many angels can dance on the head of a pin.  In general, he and I advocate simply investing in the "total market index" rather than trying to identify which sub-index (or other asset) is going to outperform the overall market in the near term.  I think that Vanguard's current efforts to revise the sub-indices that its specialty index funds follow may slightly reduce their volatility without affecting their long-term returns.

Mr. Bogle made a strong case for his "reversion to the mean" position in a paper that he wrote in 1998, which was carried on the before-mentioned web site but has since been deleted.  Perhaps the Vanguard company deleted it because it casts doubt on their efforts to market their "specialty" index funds (as well as their actively managed funds).

One of Mr. Bogles speeches that is still on the website is this:   "Public Accounting: Profession or Business? " (October 16, 2000).   This speech was delivered prior to the emergence of the Enron fiasco, and in it he took accountants to task for not exercising sufficient professional responsibility in protecting the right of shareholders to be truthfully informed about corporate finances.  Very insightful and still highly relevant!
Hi Ted and all. Reading about Vanguard kind of "Bogled"
my mind. Anyway, as a former accountant and confirmed cynic, plus having spent over 30 years in
industry, I can tell you that "Enron style" accounting
is quite wide spread although perhaps not quite to
that extreme level. Private companies also come under
pressure to "cook the books" in one way or another.
A sharp accountant can make the numbers come out about however they want. I'm not kidding. Most people do not realize this. They think it is an exact science. Nothing could be further from the truth.

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