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By Paul Justice, CFA | 10-17-2012 08:00 AM

Sauter: Cost Certainty Key With New Benchmarks

Vanguard's CIO says the fund shop is looking forward to the substantial long-term cost savings and price stability once it transitions to the FTSE and CRSP indexes, beginning next year.

Paul Justice: Hi there. I'm Paul Justice with Morningstar. A few weeks ago, Vanguard announced that it will be changing the benchmarks for 22 of its index funds. This is a major change that's going to impact a lot of assets. They are swapping out of MSCI, moving toward FTSE and CRSP for some of its international and domestic funds.

We had the opportunity to speak with Joel Dickson, an ETF Strategist over at Vanguard, a few weeks ago at our ETF Invest Conference, but to gain some more insight, today we're joined by Gus Sauter, the chief investment officer at Vanguard. Gus, thank you for joining me.

Gus Sauter: Thank you Paul. Glad to be with you.

Justice: So, this is a very broad-reaching decision that you guys have made. It's going to impact over $500 billion investor assets, certainly something that was not taken lightly. Could you explain why you decided to go about this and specifically address how you think that these changes are going to deliver cost savings to investors?

Sauter: Sure. Well, Vanguard is a unique company in our ownership structure. We're mutually owned, so the investors in our funds actually are the owners of the Vanguard Group indirectly. So, we really have no profit margin ourselves. Everything we can realize in the form of cost savings goes right through to the investors in the funds. We identified an opportunity to significantly reduce one of our most rapidly escalating costs, and that was index licensing fees, and decided to transition our existing funds to the new indexes, as you indicate.

The cost savings will be really quite substantial measured in the hundreds of millions of dollars over time and will in fact provide price certainty, as well. We have very long-term contracts with the new providers that will give a certainty of cost for many, many years and decades into the future.

Justice: Now, when you first elected to use MSCI--so you didn't always have this as your primary index provider for many funds--Vanguard really touted the quality and the construction of those indexes and how you could replicate those in an investable way. Do you feel that FTSE and CRSP, the other index providers that you’ll be using, offer similar or even enhanced benefits? Or have things changed where index providers have caught up with one another?

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