Vanguard replaces MSCI-based benchmarks on 22 index funds

Updated

Vanguard Group on Tuesday announced it plans to drop MSCI indexes as the benchmarks of 22 of its index funds over the next couple of months.

The firm will benchmark 16 of its domestic equity and balanced index funds, with aggregate assets of $367 billion, to a new index developed by the University of Chicago's Center for Research in Security Prices. Also, six Vanguard international equity index funds, with a combined $170 billion, will use FTSE benchmarks, according to a Vanguard news release.

The change affects all share classes of the 22 index funds, including ETFs.

George “Gus” Sauter, managing director and chief investment officer of Vanguard, said in the news release that the firm negotiated licensing agreements with the university's CRSP and FTSE “that we expect will enable us to deliver significant value to our index fund and ETF shareholders and lower expense ratios over time.”

The benchmarks for Vanguard's Target Retirement, LifeStrategy and Managed Payout funds of funds will also change to FTSE indexes from MSCI indexes.

The defection puts pressure on MSCI to lower the licensing fees it charges to BlackRock (BLK)'s iShares unit, the biggest ETF provider, according to David Nadig, director of research at ETF research firm IndexUniverse.

“This leaves iShares as really the only game in town for MSCI,” Mr. Nadig said. The BlackRock unit is “in a great bargaining position the next time licensing agreements come up for renewal.”

C.D. Baer Pettit, head of MSCI's index business unit, said in a statement, “We are disappointed that Vanguard will no longer use our indices as the basis for these exchange-traded funds. The ETF market in North America is competitive and as it evolves, we will work with those ETF providers who seek to utilize independent, well-respected, and high-quality equity indices in their products.”

MSCI stock on Tuesday fell as much as 30% after the Vanguard announcement, its worst decline since it went public in November 2007. MSCI closed Tuesday at 26.16, down 26.79%.

The change to FTSE benchmarks, which includes about $170 billion in assets, is the largest switch in international index providers, FTSE said in a separate statement.

BlackRock said it plans to deepen its relationship with MSCI. BlackRock Chairman and CEO Laurence D. Fink said Sept. 10 he intends to announce fee reductions for large ETFs this quarter.

“MSCI is the gold standard of global and international equity indexes,” Mark Wiedman, global head of BlackRock's iShares ETF business, said Tuesday in a statement.

Separately, MSCI disclosed in a regulatory filing Tuesday that it received a so-called Wells Notice from the Securities and Exchange Commission, informing the company it will recommend public administrative proceedings for violations of the Investment Advisers Act.

The company said in March that an employee had provided information about clients' proxy voting to a proxy solicitor in violation of its policies, according to the filing.

Vanguard's decision to change index providers was unrelated to the Wells Notice, according to John Woerth, a Vanguard spokesman.

Bloomberg contributed to this story.