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Tuesday, March 2, 2010

Vanguard Diversifies Ten Stock Funds

News summary by MFWire's editors

Tax issues led Vanguard to recently update the indexes for its 10 sector stock index mutual funds and exchange-traded funds (ETFs). A spokeswoman for the Valley Forge, Pennsylvania-based firm confirmed that they switched the funds from old MSCI indexes to new MSCI 25/50 ones, diversifying the funds to avoid extra taxation.

InvestmentNews' David Hoffman first broke the news.

"To qualify for favorable tax treatment under the IRS code, a mutual fund must meet two diversification standards," Vanguard spokeswoman Linda Wolohan told The MFWire in an emailed statement. "No more than 25% of a fund's assets may be invested in a single issuer, and no more than 50% of a fund's assets may be represented by issuers that, individually, represent 5% or more of that fund's total assets."

This meant that the Vanguard funds in question previously had to underweight parts (namely, some large companies) of the indexes and overweight other parts (smaller companies), thanks to the indexes' concentration, Wolohan confirmed.

The new indexes were developed to comply with the IRS code's requirements, and should minimize index turnover and tracking error," Wolohan stated. "This is similar to the recent move we made to shift our bond index funds/ETFs from 'standard' BarCap indexes to BarCap float-adjusted benchmarks to capture only the investable universe of bonds."

The new funds (and their new benchmarks) are:

  • Vanguard Consumer Discretionary Index Fund (MSCI US Investable Market Consumer Discretionary 25/50 Index);

  • Vanguard Consumer Staples Index Fund (MSCI US Investable Market Consumer Staples 25/50 Index);

  • Vanguard Energy Index Fund (MSCI US Investable Market Energy 25/50 Index);

  • Vanguard Financials Index Fund (MSCI US Investable Market Financials 25/50 Index);

  • Vanguard Health Care Index Fund (MSCI US Investable Market Health Care 25/50 Index);

  • Vanguard Industrials Index Fund (MSCI US Investable Market Industrials 25/50 Index);

  • Vanguard Information Technology Index Fund (MSCI US Investable Market Information Technology 25/50 Index);

  • Vanguard Materials Index Fund (MSCI US Investable Market Materials 25/50 Index);

  • Vanguard Telecommunications Services Index Fund (MSCI US Investable Market Telecommunications Services 25/50 Index);

  • and Vanguard Utilities Index Fund (MSCI US Investable Market Utilities 25/50 Index). 

    Edited by: Neil Anderson, Managing Editor

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