June Vanguard Equity Index Fund Benchmark Changes Overview of the Transition Process

Transcription

1 June 2015 Vanguard Equity Index Fund Benchmark Changes Overview of the Transition Process

2 Table of Contents 1. Introduction 3 2. How are the existing and destination indexes different? 3 3. How will the developed markets transition process work? 3 4. How will the emerging markets transition process work? 6 5. How will the weight of China A-shares be adjusted in the FTSE Emerging Markets All Cap China A Inclusion Index? 8 6. How will the transition process deal with changes to the index constituents intra review? 8 7. When will the transition process start? 9 2

3 1. Introduction FTSE has created two transition indexes to provide Vanguard with the ability to transition their existing developed and emerging markets funds to two broader based indexes. The developed markets fund will transition monthly to an index that includes Canadian and small cap stocks. The emerging markets fund will transition monthly to an index that includes China A-shares and small cap stocks. The developed and emerging market indexes will transition over six month and twelve months, respectively. 2. How are the existing and destination indexes different? Vanguard currently uses the FTSE Developed ex North America Index and FTSE Emerging Index as benchmarks for their developed and emerging markets funds. The FTSE Developed ex North America Index contains over 1,300 large and mid cap stocks in 23 developed markets. The FTSE Emerging Index contains over 900 large and mid cap stocks in 22 emerging markets. The developed markets fund will transition over six months by adding over 230 large, mid and small cap stocks from Canada and over 2,000 small cap stocks from other developed markets. These companies will contribute an additional USD 2.8 trillion or 17 per cent of the index weight. At the end of the transition the developed markets fund will be benchmarked to the FTSE Developed All Cap ex US Index with over 3,600 stocks. The emerging markets fund will transition over twelve months by adding over 1,400 large, mid and small cap A-share stocks from mainland China and over 1,000 small cap stocks from other emerging markets. These companies will contribute an additional USD 632 billion or 15 per cent of the index weight. At the end of the transition the emerging markets fund will be benchmarked to the FTSE Emerging Markets All Cap China A Inclusion Index with over 3,300 stocks. 3. How will the developed markets transition process work? The FTSE Developed All Cap ex US Transition Index will comprise of the FTSE Developed ex North America Index, the FTSE Canada All Cap Index and the FTSE Developed Small Cap ex North America Index. 3

4 Adjustment The weight of Canadian and small cap companies at the start of the transition process will be adjusted after the third Friday of each month using a factor approach to increase the index weighting of each Canadian and small cap company. At the start of the index calculation Canadian and small cap companies will have a factor of 0 applied to their free float adjusted market capitalizations. From the start of the transition each month the factor will be increased by per cent. For example, after the third Friday of month 1 the factor will be increased from 0 to , after the third Friday of month 2 from to Figure One provides an overview of this process. At month 6 the full weight of Canadian and small cap companies will have been added to the FTSE Developed All Cap ex US Transition Index and the index constituents and weightings will be aligned with the official FTSE Developed All Cap ex US Index. It is expected that after the transition Canadian stocks and developed ex Canada small cap stocks would account for 8.4% and 8.2% of the FTSE Developed All Cap ex US Index, respectively. Figure Two highlights how the weights are expected to change after each monthly transition. Figure One: Timeline of Including Canadian and Small Cap Companies to the FTSE Developed All Cap ex US Transition Index = = = 0.5 = = = 1.0 Month 0 Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 time Transition Starts Transition Complete 4

5 Weight Changes (%) Weight in Transition Index Chart Two: FTSE Developed All Cap ex US Transition Index 100% 90% Transition Phase 6 80% 70% 60% 50% Transition Phase 3 Transition Phase 4 Transition Phase 40% Transition Phase 2 30% Transition Phase % 20% 85.8% 88.3% 91.0% 93.8% 7.2% 8.4% 10% 96.8% 4.6% 5.9% 3.1% 1.6% 1.6% 3.1% 4.5% 5.8% 7.0% 8.2% 0% 0% 16.7% 33.3% 50.0% 66.7% 83.3% 100.0% Canada All Cap Small Cap ex Canada Developed ex NA Source: FTSE Group, data as at 31 March 2015 Chart Three: FTSE Developed All Cap ex US Transition Top/Bottom Five Country Weight Changes Canada would have a weight of 8.2% in the new Developed All Cap ex US Index Japan and the UK would see there weights fall by 1.9% and 1.3%, respectively Canada Austria New Zealand Ireland Greece Germany Switzerland France UK Japan Source: FTSE Group, data as at 31 March

6 Adjustment 4. How will the emerging markets transition process work? The FTSE Emerging Markets All Cap China A Transition Index will comprise of the FTSE Emerging Index, the FTSE China A All Cap Index and the FTSE Emerging Small Cap Index. The weight of China A-shares and small cap companies at the start of the transition process will be adjusted after the third Friday of each month using a factor approach to increase the index weighting of each China A-share and small cap company. At the start of the index calculation China A-shares and small cap companies will have a factor of 0 applied to their free float adjusted market capitalizations. From the start of the transition each month the factor will be increased by 8.3 per cent. For example, after the third Friday of month 1 the factor will be increased from 0 to 0.083, after the third Friday of month 2 from to Figure Four provides an overview of this process. At month 12 the full weight of China A-shares and small cap companies will have been added to the FTSE Emerging Markets All Cap China A Transition Index and the index constituents and weightings will be aligned with the official FTSE Emerging Markets All Cap China A Inclusion Index. It is expected that after the transition China A-shares and emerging ex China A- share small cap stocks would account for 5.6% and 9.8% of the FTSE Emerging Markets All Cap China A Inclusion Index, respectively. Figure Five highlights how the weights are expected to change after each monthly transition. Figure Four: Timeline of Including China A-shares and Small Cap Companies to the FTSE Emerging Markets All Cap China A Transition Index = = 0.25 = 0.5 = 0.75 = 1.0 Month 0 Month 1 Month 3 Month 6 Month 9 Month 12 time Transition Starts Transition Complete 6

7 Weight Changes (%) Weight in Transition Index Chart Five: FTSE Emerging Markets All Cap China A Transition Index (12 Months) 100% 90% 80% China A-shares (adjusted for quota) = 5.6% Small Cap stocks = 9.8% Transition Phase 12 70% Transition Phase 9 60% 50% Transition Phase 6 40% Transition Phase 3 30% 84.6% Transition Phase % 20% 91.7% 98.5% 95.6% 10% 0.9% 2.8% 5.3% 7.6% 9.8% 3.1% 4.4% 5.6% 0% 0.5% 1.6% 0% 8.3% 16.7% 25.0% 33.3% 41.7% 50.0% 58.3% 66.7% 75.0% 83.3% 91.7% 100.0% China A All Cap Small Cap ex China A-shares Emerging Chart Six: FTSE Emerging Markets All Cap China A Transition Top/Bottom Five Country Weight Changes China A-shares would have a weight (adjusted for quota) of 5.6% in the new Emerging Markets index Taiwan would have the second largest weight increase of 1.2% China excluding A-shares would see its weight fall 2.6% China s weight as a whole would be 29.2% compared to the existing FTSE Emerging weight of 26.2% China A Taiwan Thailand Pakistan Egypt India Russia Brazil South Africa China Source: FTSE Group, data as at 31 March

8 Note: China includes Red Chips, P Chips, B-shares and H-shares but not A- Shares. 5. How will the weight of China A-shares be adjusted in the FTSE Emerging Markets All Cap China A Inclusion Index? The weight of China A-shares if included in the FTSE Emerging All Cap Index by their market capitalisation adjusted for free float and foreign ownership restrictions would account for 27.4 per cent. The domestic Chinese equity market would represent a significant portion of the emerging market equity investment landscape, but there are still some restrictions in market accessibility for international investors in the China A-share market. In order to take these market restrictions into account FTSE will adjust the China A-share market capitalisation by the aggregate QFII and RQFII quota approved for international investors. This will reduce the weight of China A- shares if included in the FTSE Emerging All Cap Index by 5.6 per cent and ensure that the allocation of China A-shares is in line with the accessibility available to international investors. This approach covers not only the currently available quota schemes (i.e. QFII and RQFII), but also those from any other existing and future schemes that increase market access, such as the Shanghai-Hong Kong Stock Connect programme, when they are deemed suitable.. 6. How will the transition process deal with changes to the index constituents intra review? In both transition indexes any increase (decrease) in index weight by a constituent expected to fall (rise) in weight at the next transition review will have their weights adjusted to ensure such weight increases/decrease would not shift the transition index in the opposite direction to that which is intended and would partially negate the transition mechanism. For example, if an existing FTSE Emerging Index constituent was deleted due to an acquisition by a non-constituent, the proceeds from the corporate event would be reinvested in constituents whose weights would be expected to increase at the next transition review. In order to reduce the impact of turnover on the transition indexes any additions to the FTSE Developed All Cap ex US Index and FTSE Emerging 8

9 Markets All Cap China A Inclusion Index will be included in the FTSE Developed All Cap ex US Transition and FTSE Emerging Markets All Cap China A Transition Indexes at the next transition monthly review. 7. When will the transition process start? FTSE will send a notification when the transition process will start for each of the transition indexes. When the transition process ends and both transition indexes have the same constituent weights as their destination indexes, each transition index will be decommissioned. FTSE will send a notification when the transition process ends and we will decommission each transition index. 9

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