Market Overview

Vanguard Shifts Indexes On 3 ETFs Ahead Of Sector Changes

Vanguard Shifts Indexes On 3 ETFs Ahead Of Sector Changes

Previously announced changes to the telecommunications sector, including renaming that sector as communications services, will take full effect in late September, but some issuers of exchange traded funds are already in preparation mode.

Vanguard, the second-largest U.S. ETF sponsor, said it is changing the benchmarks on three of its sector ETFs in anticipation of the new-look communications services sector. The affected ETFs are the Vanguard Telecommunications ETF (NYSE: VOX), the Vanguard Consumer Discretionary ETF (NYSE: VCR) and the Vanguard Information Technology ETF (NYSE: VGT).

“Beginning in the second quarter of 2018, the funds will track custom transition benchmarks,” Vanguard said in a statement issued last week.

“These interim benchmarks are designed to ensure the changes are implemented in the most transparent, cost-efficient way for the funds' investors, while also reducing tracking error and mitigating market impact. The funds will track these custom benchmarks until MSCI's index changes are complete, at which time the funds will revert back to their applicable MSCI benchmarks.”

Big Changes For Telecom

Traditional telecom ETFs, such as VOX, are dominated by the likes of AT&T Co. (NYSE: T) and Verizon Communications Inc. (NYSE: VZ), but that is set to change.

The new communications services sector “will include the existing telecommunication companies, as well as companies selected from the Consumer Discretionary Sector currently classified under the Media Industry Group and the Internet & Direct Marketing Retail Sub-Industry, along with select companies currently classified in the Information Technology Sector,” according to index provider MSCI.

While index providers MSCI and Standard & Poor's have yet to reveal the specific stocks that will depart the consumer discretionary and technology sectors for new homes in communications services, there is speculation that Google parent Alphabet Inc. (NASDAQ: GOOGL) and Facebook Inc. (NASDAQ: FB) could be among the names to depart technology for communications services.

Nothing New For Vanguard

Pennsylvania-based Vanguard has previously used transition benchmarks to accommodate major index shifts.

“Vanguard has successfully employed transition benchmarks in the past to execute benchmark changes including the 2016 transition of the Vanguard Emerging Markets Stock Index Fund to the FTSE Emerging Markets All Cap China A Inclusion Index, and Vanguard Developed Markets Index Fund's 2015 changes to the FTSE Developed All Cap ex-U.S. Index benchmark,” said Vanguard.

At the end of January, VCR, VGT and VOX had a combined $22.6 billion in assets under management.

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