(PUB) Investing 2015

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The Independent Adviser for Vanguard Investors • July 2015 • 13 FOR CUSTOMER SERVICE, PLEASE CALL 800-211-7641
May, the fund’s current benchmark
index returned 86.3%, while the new
benchmark returned 96.0%. Rewind 12
months to the end of May 2014, and
the two indexes were even closer in
performance, with the current bench-
mark up 80.3% versus the new index’s
82.7% gain. It’s taken the massive
run in Chinese A-shares over the past
year—which some analysts are call-
ing a bubble—for investors to start to
notice any meaningful difference in
performance.
Vanguard’s marketing department
will get a lot more mileage out of being
the first to include A-shares in their
index fund than investors will get out
of actually owning those shares, since
Vanguard can trumpet having the first
large emerging markets index fund (or
ETF) to include ChineseA-shares. Their
top emerging markets index competi-
tor, the $30 billion iShares Emerging
Markets ETF (EEM), follows an MSCI
index that does not currently include
Chinese A-shares. That doesn’t mean it
won’t, though.
MSCI announced in June that it
expects to add Chinese A-shares to its
index, but is not prepared to do so at
this time due to concerns about liquid-
ity and the quotas. So, Vanguard will be
able to claim to be “first”—for whatev-
er that’s worth. (I guess Vanguard isn’t
counting the much smaller KraneShares
FTSE Emerging Markets Plus ETF,
which has under $3 million in assets
but launched in February and currently
allocates about 20% of its portfolio to
Chinese A-Shares.)
Plenty of ink has been spilled about
the “ChinaMiracle” and Chinese stocks,
but at the end of the day the addition of
a restricted amount of Chinese A-shares
just doesn’t move the needle for most
investors’ portfolios. If you had 10%
of your portfolio in Emerging Markets
Stock Index (which is more than most
people do), well, five percent of a 10%
position is only 0.50%. And the net
addition of a 3% position to Chinese
stocks means it’s more like a 0.30%
change in your portfolio. What’s the big
deal? If that doubles or disappears over-
night, you’ll be hard-pressed to notice
the change, except in the headlines.
Small Caps
As I mentioned before, Emerging
Markets Stock Index isn’t the only
foreign stock index fund at Vanguard
about to get a new benchmark.
Developed Market Index, European
Stock Index and Pacific Stock Index
will also move to new bogeys in the
second half of the year. Again, all the
funds are sticking with FTSE as the
benchmark arbiter, but are transitioning
to broader benchmarks which include
small-cap stocks—currently the funds
track indexes of large and mid-sized
stocks.
In addition to picking up small cap-
stocks, Developed Markets Index’s new
benchmark will include Canada. In
order to manage costs, Vanguard plans
to take six months or so to build the full
8% position in Canadian stocks in the
portfolio.
As I said when Total International
Stock Index added Canada to its hold-
ings, this is small potatoes for inves-
tors. However, by adding Canada to
Developed Markets Index, the only thing
separating these two index funds will be
be Total International Stock’s 18.8%
allocation to emerging market stocks.
The charts above compare the perfor-
mance of each fund’s current and new
benchmark over the past dozen years or
so—the earliest point for which I could
find data. Small-cap stocks would have
benefited Developed Market Index, as
its new bogey outperformed its current
benchmark 155.2% to 143.2% from the
end of September 2003 through May
2015. European Stock Index would’ve
seen a similar boost in performance
by including small-caps stocks, as the
new bogey’s 165.5% gain outpaced the
current index’s 147.7% return. In the
case of Pacific Stock Index, including
small-cap stocks would have reduced
returns, as the current benchmark out-
performed the new index 131.9% to
129.8%—though an investor would be
hard-pressed to notice that difference.
You can think of differences
between the old and new index bogeys
as being somewhat akin to the differ-
ences between the old index warhorse
500 Index and the newer Total Stock
Market Index. Index purists will pre-
fer the new bogeys as they are more
complete, and Vanguard’s marketing
department will have another oppor-
tunity to talk up the benefits of broad,
broad diversification. Over the long
haul, adding small-cap stocks should
benefit shareholders’ bottom line, but
those extra gains won’t come year-in
and year-out, and the investor experi-
ence will be very similar. n
Foreign Developed:
Small Stocks AddMarginally
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FTSE Developed ex N. America Idx. (current bmrk.)
FTSE Developed All Cap ex US Idx. (new bmrk.
w/ sm-cap and Canadian stocks )
$75
$125
$175
$225
$275
$325
Europe: Small Stocks
AddedMarginally
FTSE Developed Europe Index (current bmrk.)
FTSE Developed Europe All Cap Index (new
bmrk. w/ sm-cap stocks)
$90
$140
$190
$240
$290
$340
5/045/055/065/075/085/095/105/115/12 5/135/145/15
Asia: Hard Pressed to
Notice a Difference
FTSE Developed Asia Pacific Idx. (current bmrk.)
FTSE Developed Asia Pacific All Cap Index
(new bmrk. w/ sm-cap stocks)
$80
$105
$130
$155
$180
$205
$230
$255
$280
5/045/055/065/075/085/095/105/115/125/13 5/145/15