Four Vanguard International Equity Index Funds To Broaden Diversification With All-Cap Exposure

Vanguard FTSE Emerging Markets ETF (VWO), World's Largest Emerging-Markets ETF, First to Offer China A-Shares and All-Caps

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Jun 02, 2015, 08:38 ET

VALLEY FORGE, Pa., June 2, 2015 /PRNewswire/ --

Summary

Four Vanguard international equity index funds will more broadly diversify with the addition of small-cap stocks, and will follow broader FTSE all-cap benchmarks as a result.
China A-shares will be added to Vanguard Emerging Markets Stock Index Fund and its ETF share class—VWO, the world's largest emerging markets ETF—making them the first broad-based emerging markets, market-cap weighted index fund and ETF to include exposure to A-shares and all-caps.
Canadian exposure will be added to Vanguard Developed Markets Index Fund, making it the largest developed markets index fund to offer all-cap exposure to all developed markets outside the U.S.
The four funds' low expense ratios are not expected to increase as a result of these changes.

Vanguard today announced that four U.S.-domiciled international equity index funds, representing $147 billion in assets, will broaden diversification and transition to all-capitalization benchmarks. One of the funds, Vanguard Emerging Markets Stock Index Fund and its ETF shares (Vanguard FTSE Emerging Markets ETF, ticker: VWO), will gain exposure to China A-shares, making it the first broad-based market-capitalization weighted index fund to include these shares and all-cap exposure[1]. Another of the four funds, Vanguard Developed Markets Index Fund, will also include Canadian equities.

The $69 billion Vanguard Emerging Markets Stock Index Fund, $52 billion Vanguard Developed Markets Index Fund, $20 billion Vanguard European Stock Index Fund, and $6 billion Vanguard Pacific Stock Index Fund will move from FTSE benchmarks containing large- and mid-capitalization stocks to broader FTSE benchmarks that include large-, mid-, and small-capitalization stocks, as shown in the accompanying table.

Fund	Current FTSE Benchmark	New FTSE Benchmark	Benchmark Composition Changes
Vanguard Emerging Markets Stock Index Fund	FTSE Emerging Index	FTSE Emerging Markets All Cap China A Inclusion Index[2]	Exposure to 1,845 new small-cap stocks (11.1% of index) Exposure to 1,411 new China A-share stocks (5.6% of index)
Vanguard Developed Markets Index Fund	FTSE Developed ex North America Index	FTSE Developed All Cap ex US Index	Exposure to 2,248 new small-cap stocks (9.9% of index) Exposure to 234 new Canadian stocks (8.2% of index)
Vanguard European Stock Index Fund	FTSE Developed Europe Index	FTSE Developed Europe All Cap Index	Exposure to 724 new small-cap stocks (9% of index)
Vanguard Pacific Stock Index Fund	FTSE Developed Asia Pacific Index	FTSE Developed Asia Pacific All Cap Index	Exposure to 1,331 new small-cap stocks (9.4% of index)

"Global markets have evolved to become more accessible, presenting an opportune time to provide investors with exposure to more markets and additional diversification within those markets," said Vanguard CEO Bill McNabb.

All-cap exposure
Adding small-cap exposure to the four funds moves investors closer to complete global market-cap weightings and fuller diversification benefits. Under the funds' new benchmarks, small-cap stocks will account for approximately 9%-11% of each fund. "The best proxy for a market is one that provides the most complete and comprehensive market-cap weighted coverage, which is why we believe these moves are in the best interests of investors," said Mr. McNabb. The funds will join Vanguard's flagship "total market" international funds, the Vanguard Total International Stock Index Fund and the Vanguard Total World Stock Index Fund, in offering investors exposure to all-cap stocks.

China A-shares in Emerging Markets Stock Index Fund
The addition of China A-shares to the Emerging Markets Stock Index Fund and its ETF share class, VWO, the world's largest emerging-markets ETF[3], will provide investors with more complete exposure to a key emerging economy and the second-largest stock market in the world by market cap. With the world's second-largest GDP, China accounts for 20% of global trade and 7% of global consumption[4]. China A-shares will represent 5.6% of the new benchmark for the Emerging Markets Index Fund. Vanguard[5] recently received a quota for China A-shares, which provide exposure to China's largest issuers and a level of diversification that isn't otherwise available in the market.

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 the Shanghai Hong Kong Stock Connect program.

"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.

Canada in Developed Markets Index Fund
By adding Canada, the Developed Markets Index Fund will be the largest index fund of its type to offer all-cap exposure to all developed markets outside the U.S. [6] Canada will represent 8.2% of the fund's new benchmark.

Additional transition details
The expense ratios of the funds' shares (Investor, Admiral, Institutional, Institutional Plus, and ETF) are not expected to be affected by these changes. The expense ratios range from 0.06% to 0.33%, as of each fund's current prospectus.

The benchmark changes will encompass all share classes of the four funds and will be staggered over several months in order to ensure an orderly and cost-effective transition.

Vanguard does not 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 transitions.

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

About Vanguard
Vanguard, headquartered in Valley Forge, Pennsylvania, is one of the world's largest investment management companies. As of April 30, 2015, Vanguard managed $3.3 trillion in U.S. mutual fund assets, including more than $470 billion in ETF assets. The firm offers 159 funds to U.S. investors and more than 120 additional funds in non-U.S. markets. For more information, visit vanguard.com.

[1] Source: Bloomberg and Morningstar, as of March 31, 2015.

[2] FTSE Emerging Markets All Cap China A Inclusion Index comprises large-, mid- and small-cap 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 international investors.

[3] Source: Strategic Insight, as of April 30, 2015.

[4] Sources: World Bank, International Monetary Fund, and World Trade Organization, 2014.

[5] China A-shares quota obtained by Vanguard Investments Australia through a Renminbi Qualified Foreign Institutional Investor (RQFII) license.

[6] Morningstar, Bloomberg, and Vanguard, as of March 31, 2015.

All asset figures are as of April 30, 2015, unless otherwise noted.

For more information on Vanguard funds, visit vanguard.com, or call 800-662-7447 to obtain a prospectus. Visit our website, call 800-662-7447, or contact your broker to obtain a prospectus for Vanguard ETF Shares. Investment objectives, risks, charges, expenses, and other important information are contained in the prospectus; read and consider it carefully before investing.

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Mutual funds and ETFs are subject to risks, including possible loss of principal. Investments in bond funds are subject to interest rate, credit, and inflation risk. Investments issued by non-U.S. companies are subject to risks including country/regional risk, which is the chance that political upheaval, financial troubles, or natural disasters will adversely affect the value of securities issues by companies in foreign countries or regions; and currency risk, which is the chance that the value of a foreign investment, measured in U.S. dollars, will decrease because of unfavorable changes in currency exchange rates. Foreign investing involves additional risks including currency fluctuations and political uncertainty. Stocks of companies based in emerging markets are subject to national and regional political and economic risks and to the risk of currency fluctuations. These risks are especially high in emerging markets. Diversification does not ensure a profit or protect against a loss.

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