ETF providers change indexes

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An increasing number of index exchange-traded funds (ETFs) are switching indexes to save themselves money, but those changes might leave you with a slightly different investment.

In October 2012, 22 Vanguard ETFs switched from Morgan Stanley Capital International indexes to less expensive Financial Times Stock Exchange and University of Chicago Center for Research in Security Prices indexes. Whether more ETFs will switch indexes or whether the threat of more doing so will force indexes to reduce their fees is unknown, says Tom Lydon, who is the editor of ETFTrends.com. What is certain, he says, is that “every ETF provider is looking at the contracts they have with the index providers, and they’re going to the table negotiating.”

An index ETF attempts to mimic the performance of an underlying index and pays licensing fees to the companies that own the indexes. The ETFs pass those fees on to investors.

Although most ETFs that switch indexes likely won’t make radical changes, some ETFs will have to buy and sell investments to ensure that their holdings mimic that of the new indexes more closely, Lydon says.