Vanguard Revamps Sector Indexes
March 2, 2010

SAN DIEGO (ETFguide.com) – Vanguard has just revamped the benchmarks used for its lineup of ten industry sector funds.

The funds now follow newly constructed MSCI 25/50 sector indexes that are compliant with IRS diversification rules.

The move will impact both Vanguard’s sector mutual funds along with its ETF share class. Both products follow the same underlying indexes.  

Historically, the MSCI Consumer Staples Index (NYSEArca: VDC), the MSCI Energy Index (NYSEArca: VDE), and the MSCI Telecommunications Services Index (NYSEArca: VOX) have had significant concentration in a few issuers, which has kept them from meeting the diversification standards under the code.  To ensure compliance with the code’s diversification standards, the funds tracking these indexes have periodically had to underweight certain larger companies and overweight smaller companies relative to the relevant index weightings. Divergences from the index weightings have triggered a problem known as tracking error. It causes the funds’ performance to deviate from the performance of their benchmark indexes.

The new indexes were developed to comply with the IRS code's requirements and should minimize index turnover along with tracking error. This is similar to the recent shift by Vanguard’s bond index funds/ETFs from 'standard' BarCap indexes to BarCap float-adjusted benchmarks to capture only the investable universe of bonds.

To qualify for favorable tax treatment under the IRS code, a mutual fund must meet two diversification standards. 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.

At the end of January, Vanguard had around $92 billion in ETF assets.

Here are a list of the Vanguard Sector ETFs and their updated MSCI Benchmarks:

--Vanguard Consumer Discretionary Index Fund (NYSEArca: VCR)
MSCI US Investable Market Consumer Discretionary 25/50 Index

--Vanguard Consumer Staples Index Fund (NYSEArca: VDC)
MSCI US Investable Market Consumer Staples 25/50 Index

--Vanguard Energy Index Fund (NYSEArca: VDE)
MSCI US Investable Market Energy 25/50 Index

--Vanguard Financials Index Fund (NYSEArca: VFH)
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 (NYSEArca: VIS)
MSCI US Investable Market Industrials 25/50 Index

--Vanguard Information Technology Index Fund (NYSEArca: VGT)
MSCI US Investable Market Information Technology 25/50 Index

--Vanguard Materials Index Fund (NYSEArca: VAW)
MSCI US Investable Market Materials 25/50 Index

--Vanguard Telecommunications Services Index Fund (NYSEArca: VOX)
MSCI US Investable Market Telecommunications Services 25/50 Index

--Vanguard Utilities Index Fund (NYSEArca: VPU)
MSCI US Investable Market Utilities 25/50 Index