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Vanguard announces 4 international index funds to broaden diversification

June 02, 2015

Vanguard announced today that four international equity index funds and ETFs will broaden their diversification by adding small-capitalization stocks to their investment portfolios. One of the four funds will also add China A-shares1, and another will add Canadian equities.

  • Small-cap exposure will be added to Vanguard Emerging Markets Stock Index Fund (VWO and VEMAX), Vanguard Developed Markets Index Fund (VEA and VTMGX), Vanguard European Stock Index Fund (VGK and VEUSX), and Vanguard Pacific Stock Index Fund (VPL and VPADX).
  • The Emerging Markets Stock Index Fund will add exposure to China A-shares, making it the first broad-based market-cap-weighted index fund to include these shares.
  • The Developed Markets Index Fund will add exposure to Canadian equities.

"Global markets have evolved to be more accessible, presenting an opportune time to provide investors with more diversified market exposure and enhanced market coverage," said Vanguard Chairman and CEO Bill McNabb.

The funds' expense ratios aren't expected to be affected.

Moving to broader all-cap benchmarks

The affected funds and ETFs are expected to begin the transition to more broadly diversified FTSE all-capitalization benchmarks in the third or fourth quarter of 2015. Under the new benchmarks, small-cap stocks will account for approximately 9% to 11% of each fund. Adding small-cap exposure will bring the funds closer to global market-cap weightings and offer diversification benefits to investors.

The funds and ETFs will join Vanguard's "total market" international funds, Vanguard Total International Stock Index Fund (VXUS and VTIAX) and Vanguard Total World Stock Index Fund (VT and VTWSX), in offering investors exposure to all-cap stocks.

"The best proxy for a market is one that provides the most complete and comprehensive coverage, which is why we believe these moves are in the best interests of investors over the long term," Mr. McNabb said.

The current and new benchmarks for the four funds are shown below. The Emerging Markets Stock Index Fund and the Developed Markets Index Fund will initially track transition indexes that will be updated monthly.

Vanguard fund and ETFCurrent benchmarkTransition benchmarkNew benchmark
Emerging Markets Stock Index Fund and ETF FTSE Emerging Index FTSE Emerging Markets All Cap China A Inclusion Transition Index2 FTSE Emerging Markets All Cap China A Inclusion Index2
Developed Markets Index Fund and ETF FTSE Developed ex North America Index FTSE Developed All Cap ex US Transition Index FTSE Developed All Cap ex US Index
European Stock Index and ETF FTSE Developed Europe Index FTSE Developed Europe All Cap Index
Pacific Stock Index and ETF FTSE Developed Asia Pacific Index FTSE Developed Asia Pacific All Cap Index

China A-shares in emerging markets fund

With the world's second-largest GDP, China accounts for 11% of global trade and 8% of global consumption3. The new benchmark for the Emerging Markets Stock Index Fund and ETF includes a weighting of approximately 5.6% for China A-shares as of March 31, 2015.

The addition of China A-shares to the fund and its ETF share class, VWO, the world's largest emerging-markets ETF,4 will provide investors with more complete exposure to a key emerging economy and the second-largest stock market in the world by market capitalization.

"As the first major emerging markets fund to add exposure to China A-shares, the fund will benefit investors with more diversification, deeper emerging markets exposure, and greater access to the growth potential of Chinese equities," said Mr. McNabb.

Canadian equities in developed markets fund

The Developed Markets Index Fund and ETF will be the largest fund of its type to offer all-cap exposure to all developed markets outside the United States, including Canada.5 The fund's new benchmark includes Canada at an 8% weighting as of March 31, 2015. This weighting more accurately reflects Vanguard's view of developed markets and the importance of Canada's economy in the global marketplace.

Benchmark transitions

The benchmark changes will take place over a period of several months starting in the third or fourth quarter of 2015.

The Emerging Markets Stock Index Fund and the Developed Markets Index Fund will follow transition benchmarks for approximately 12 months and six months, respectively to ensure an orderly and cost-effective transition. The changes to the European Stock Index Fund and the Pacific Stock Index Fund won't require transition benchmarks.

Vanguard doesn't expect the transitions to result in capital gains distributions to the funds' shareholders, according to analysis based on the expected trading activity and the funds' current realized and unrealized capital gain and loss positions. Each of the funds currently possesses realized capital losses, which can be used to offset any gains realized in the transition.

The transitions will require turnover of holdings, resulting in short-term transaction costs. Vanguard Equity Index Group, advisor to the funds and ETFs, will seek to minimize any impact through the use of efficient portfolio trading, optimization techniques, and other expert strategies developed over many years and used during the periodic rebalancing of indexes.

1 China A-shares are equity shares in mainland China companies that are traded on the Shanghai and Shenzhen stock exchanges and are only available to foreign investors through regulated systems including the Qualified Foreign Institutional Investor (QFII) and Renminbi Qualified Foreign Institutional Investor (RQFII) systems or through the Shanghai-Hong Kong Stock Connect program.

2 The FTSE Emerging Markets All Cap China A Inclusion Index comprises large-, mid-, and small-capitalization securities of the FTSE Emerging All Cap Index and FTSE China A All Cap Index. The weight of the FTSE China A All Cap Index in the FTSE Emerging Markets All Cap China A Inclusion Index will be adjusted by the quota available to foreign investors.

3 Sources: World Bank, International Monetary Fund, World Trade Organization.

4 Source: Strategic Insight, as of April 2015.

5 Sources: Morningstar, Bloomberg, and Vanguard.

Notes:

  • Vanguard ETF Shares are not redeemable with the issuing fund other than in very large aggregations worth millions of dollars. Instead, investors must buy and sell Vanguard ETF Shares in the secondary market with the assistance of a stockbroker. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.
  • All investing is subject to risk, including the possible loss of the money you invest.
  • Diversification does not ensure a profit or protect against a loss.
  • Investments in stocks issued by non-U.S. companies are subject to risks including country/regional risk and currency risk. These risks are especially high in emerging markets.
  • Prices of mid- and small-cap stocks often fluctuate more than those of large-company stocks.
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