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Vanguard to change indexes for seven funds

©Associated Press
April 13, 2003

NEW YORK -- Vanguard Group has decided to revamp seven of its popular index funds, aligning them with indexes operated by Morgan Stanley Capital International to cut costs and improve returns.

The funds will be switched by the end of September, six of them abandoning indexes compiled by Standard & Poor's and one moving from an index run by Frank Russell Co.

Vanguard is making the changes because the MSCI indexes better represent certain investment styles, said Gus Sauter, managing director of Vanguard's Quantitative Equity Group.

Sauter said the move will also lower funds' operating costs, in keeping with Vanguard's low-cost reputation. The MSCI indexes have more flexible rules about what stocks are included in the various indexes, resulting in less frequent trades and therefore lower trading costs, he said.

"Over the years, we have developed what we think are the characteristics of an ideal index. We're not just changing (index) benchmarks," Sauter said.

The seven funds to be affected are: Mid-Cap, Value, Growth, Small-Cap, Small-Cap Growth, Small-Cap Value and Variable Insurance Mid-Cap

The Vanguard 500 Index fund, a $67-billion household name, will continue to track the S&P 500, Sauter said.

"Investors frequently say they want an S&P 500 fund. It happens to have a great deal of brand recognition. With the other funds, investors don't say, 'I want a certain small-cap value fund,' " Sauter said.

S&P disputes Vanguard's claim that the way it manages its indexes doesn't best represent various investment styles or asset classifications.

"The mid-cap and small-cap indices are world class. They have had tremendous support," said Lynn Cohn, a spokeswoman for S&P.

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