Vanguard Emerging Markets Stock Index Fund completes transition

OREANDA-NEWS. September 20, 2016. The \\$59 billion Vanguard Emerging Markets Stock Index Fund has completed its transition to a new index that includes small-capitalization equities and China A-shares, effective with the start of trading on September 19, 2016. The move completes a previously announced change that brings the fund closer to market-cap weightings and offers increased diversification to investors.

The fund's index, the FTSE Emerging Markets All Cap China A Inclusion Index, is a market-cap-weighted benchmark representing the performance of large-, mid-, and small-cap companies in emerging markets.¹

The fund had tracked a transition index since November 2015 while its portfolio managers gradually built exposure to small-cap equities and China A-shares:

Changes bring enhanced diversification

As of August 31, 2016, the new benchmark represented approximately 3,561 securities from 22 countries, including new exposure to more than 1,800 small-cap firms (11% of the index) and 1,500 China A-share companies (5% of the index).

By adding small-cap equities and China A-shares, the fund becomes the first broad-based, market-cap-weighted emerging markets index fund to offer China A-shares and all-capitalization equity exposure.²

The benchmark change isn't expected to affect the fund's expense ratios or trigger capital gains distributions. Improved market conditions have lowered the cost of investing in international small-cap equities, creating an opportune moment to broaden the fund's investment strategy.

Investing in China A-shares

China A-shares are equity shares in mainland China companies that are traded on the Shanghai and Shenzhen stock exchanges and are available to foreign investors only through regulated programs. China A-shares increase diversification for investors by providing access to mainland Chinese companies.

China is one of the world's key emerging economies and the second-largest stock market in the world by market cap. With the world's second-largest GDP, China accounts for 16% of world GDP and had a 6.3% GDP growth rate through the first half of 2016.³

Vanguard believes access to this key market has the potential to offer significant long-term benefits for investors.

Last in a series of international fund transitions

The Emerging Markets Stock Index Fund is the last of four U.S.-domiciled international equity index funds to complete a move to all-cap strategies that Vanguard announced in June 2015.

Two of the funds, Vanguard European Stock Index Fund and Vanguard Pacific Stock Index Fund, began tracking all-cap equity indexes on October 1, 2015. The third, Vanguard Developed Markets Index Fund, began tracking a new index that includes small-cap and Canadian equities, effective June 1, 2016.

Additional information, including performance returns, weights, and constituent-level data for the former, destination, and transition indexes, is available on FTSE's Vanguard portal.

¹The FTSE Emerging Markets All Cap China A Inclusion Index comprises large-, mid-, and small-cap securities of the FTSE Emerging All Cap Index and the FTSE China A All Cap Index. The weight of the FTSE China A All Cap Index in the FTSE Emerging Markets All Cap China A Inclusion Index will be adjusted by the quota available to international investors.

²Sources: Bloomberg and Morningstar.

³Sources: Quandl, 2015; International Monetary Fund, 2016.

Notes:

• All asset figures are as of August 31, 2016, unless otherwise noted.
• All investing is subject to risk, including the possible loss of the money you invest. Diversification does not ensure a profit or protect against a loss. Prices of mid- and small-cap stocks often fluctuate more than those of large-company stocks.
• Investments in stocks issued by non-U.S. companies are subject to risks including country/regional risk and currency risk. These risks are especially high in emerging markets and, in particular, in countries where market controls may impede investment.