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Vanguard to Introduce Three International ETFs

Sail Boat

The Vanguard Group today filed an application with the SEC to introduce exchange-traded fund shares for three of its existing international index funds. Pending SEC approval, European Stock Index, Pacific Stock Index, and Emerging Markets Stock Index will be the next round of Vanguard index funds to offer VIPERs (Vanguard Index Participation Equity Receipts) share classes.

Vanguard's European Stock Index fund tracks the MSCI Europe index, which is a collection of securities from 15 European countries. Emerging Markets Stock is tied to the Select Emerging Markets Free Index, a diversified index with over 400 stocks from 13 different countries. Finally, Vanguard Pacific Stock follows the MSCI Pacific Free Index, a basket of predominantly Japanese stocks that also includes securities from Hong Kong, Australia, New Zealand, and Singapore.

If approved, the new Vanguard offerings will significantly expand the number of diversified international ETFs, an area that is still wide open. Barclays Global Investors launched the iShares MSCI EAFE in August of last year, and the fund is the fourth-largest ETF trading on the American Stock Exchange, with about $3.9 billion in assets as of the end of last week. BGI also has a lineup of international ETFs that provide exposure to MSCI country basket indexes.

Valley Forge, PA-based Vanguard currently offers two ETFs as share classes of its domestic index funds: Total Stock Market VIPERs and Extended Market VIPERs, which have $1.2 billion in assets combined, according to Vanguard.

Vanguard has taken a unique approach by offering ETFs as a separate share class of its existing index funds, and investors in those traditional funds should benefit from a tax standpoint. Because of their "in-kind" creation and redemption feature, ETFs are able to get rid of their low cost basis stock every time redemption occurs (low cost basis stock are those that have risen significantly in price and trigger capital gains taxes when sold).

"This particular attribute of ETFs should be a benefit for shareholders in the Vanguard traditional mutual fund, which would be able to gradually shed its low cost basis stock as redemptions occur in the ETF share class," wrote Jim Wiandt in a previous IndexFunds.com article. "Conversely, since shareholders in all classes of the fund will share distributions equally, investors in the Vanguard VIPERs share class would be expected to be exposed to lower cost basis stock than those in a 'pure' ETFs."

Vanguard said expense ratios for the three potential international VIPERs have yet to be determined. The table below shows fundamental information on the three Vanguard funds tagged for new ETF share classes.

Vanguard Stock Index Fund
Emerging Markets
European
Pacific
Expense Ratio
0.60%
0.30%
0.37%
Median Mkt Cap ($MM)
5,103
37,340
11,224
Net Assets ($MM)
1,007
4,559.4
1,598.9
Std Dev - 5 Yr
29.18%
17.53%
20.42%
Tot Annualized Ret - 3 Yr
-4.57%
-5.84%
-8.89%
Tot Annualized Ret - 5Yr
-6.91%
2.68%
-8.32%
Total Number of Holdings
488
567
473
Turnover Ratio
23%
3%
2%

Source: Morningstar data as of 6/30/2002