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Expect more index funds and ETFs to cut expense ratios if BlackRock or other companies secure price cuts for index services, or drop existing indexing firms in favor of lower-cost providers. "Indexing, particularly through ETFs, is going to get cheaper and cheaper," says Daniel Wiener, editor of an independent newsletter on Vanguard's funds. 2. GREATER SCRUTINY The FTSE indexes that Vanguard will use for six foreign stock funds are well-established. The CRSP indexes that 16 of its U.S. stock funds will track are well-known to institutional investors who have been using CRSP benchmarks for years. But those indexes haven't been used by funds open to average investors. It will take a while for those investors to learn how the CRSP indexes differ from benchmarks such as MSCI's. The rules that CRSP uses to determine stock index membership are more complex than those for many better-known benchmarks. 3. MORE PORTFOLIO ADJUSTMENTS The CRSP and FTSE indexes that Vanguard is moving to are similar to the MSCI benchmarks those funds currently track. But there are small differences, and Vanguard index fund managers will have to buy certain stocks and sell others in coming months so that fund holdings track the new benchmarks. "This move is similar to an active mutual fund making a manager change," says Todd Rosenbluth, a fund analyst with S&P Capital IQ. For example, Vanguard Emerging Markets Index, or VEIEX, will no longer own South Korean stocks, because its new index
-- FTSE Emerging Markets -- classifies that country among the world's developed markets. The MSCI index the fund has been using classifies South Korea as an emerging market. In fact, Korean stocks make up nearly 16 percent of that index. As a result of Vanguard's move, Korean stocks like Samsung Electronics
-- the largest single company in the MSCI index -- will be sold from the fund's portfolio. If more funds and ETFs switch benchmarks at Vanguard and elsewhere, the resulting changes in fund holdings could come as a surprise unless an investor pays attention. Rosenbluth says that there will be "subtle changes" that will impact returns. ___ Questions? E-mail investorinsight@ap.org.
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