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Fund Spy

Sudden Shakeup at a Vanguard Index Fund

An already-daring fund gets a bold new look.

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Although index funds aren't actively managed, their portfolios aren't set in stone, either. Most index investors realize this. In fact, when the most well-known index funds--the S&P 500 trackers--occasionally have to shuffle their holdings in response to additions or deletions in the underlying index, the moves typically receive a flurry of media attention. That said, though, the effects of such changes on the funds' overall composition tend to be minimal.

That's not the case, however, with  Vanguard Emerging Markets Stock Index (VEIEX). A recent change in that fund's underlying index resulted in quite a shakeup in its portfolio. Although this incident is unusual and does not foreshadow any trend, it's worth a look because it provides a graphic illustration of the fact that a passively managed fund is not static. While we're at it, we'll also evaluate what effects this change has had on the fund's profile.

Tear Down That Wall
Ever since its 1994 inception, Vanguard Emerging Markets has been an oddball in one important way. Rather than track the standard MSCI Index in its field, as do other Vanguard international indexers, this fund has instead used a custom-made version of the MSCI Emerging Markets Free Index. The "Free" index excluded or underweighted some markets that were so difficult to trade in that it wasn't practical to include them--and Vanguard's version added more countries to that list. Those exclusions set the fund apart from actively managed diversified-emerging-markets funds, which typically did buy stocks in many of those countries.

Gregg Wolper does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.