There is a cute story about Yogi Berra's response when asked whether he wanted his pizza pie sliced into four or eight pieces:
"You had better cut four because I can't eat eight," he supposedly said.
Of course it does not really matter how many slices are cut from the pizza, there is just as much pie either way. So, why is the famously pragmatic Vanguard splitting the shares in three of its ETFs? After all, shareholders of the Total Market, Extended Market and Emerging Markets ETFs will wind up with twice the shares at half the price meaning that their situation is unchanged.
While Vanguard spokespeople were out of the office Tuesday and unable comment on the move, the press release notes that each of the funds currently sports an NAV of more than $100. Perhaps the decision was made to bring the share price back into the double digits.
The move could have an additional impact, however. By slicing the shares in half, Vanguard is presumably also cutting the cost of forming a creation unit in half. Currently both Extended Market and Emerging Markets have creation units made up of the underlying securities represented by 100,000 shares. Total Stock Market investors need 50,000 shares worth of securities to form a creation unit.
Nothing in the release suggests that these requirements are changing (again, Vanguard officials were not available for comment). That means that the cost of putting the basket together should fall by half when the split occurs on June 13.
The savings for institutional investors and market makers to form on creation unit will be substantial. An Emerging Markets creation unit now costs $11.662 million, an Extended Market CU costs $10.5 million. Meanwhile, a Total Stock Market CU is a relative bargain at $7.3 million. Thus, the move could save institutional investors $3.5 million to $5.5 million when they buy one unit.
While the ETFs effected by the moves do not have the most costly creation units -- see the table below for a sample of unit costs in Vanguard's family of 37 ETFs -- they are all on the higher side.
Why could this be important? Creation units are used by arbitrageurs to trade securities for ETF shares if the NAV rises above the value of the portfolio (and vice versa if there is a discount). Cheaper creation units should make it easier for arbitrageurs to do their job and allow the NAVs to continue to closely track the value of the portfolio.
As the cost of the creation unit rises with the ETF's NAV, this may be an adjustment we will see again in the future.
| Vanguard Creation Unit Values|
(17 of 37 ETFs Sampled)
| ETF Creation Unit || CU Value, $MM || Date |
| FTSE All-World ex-US || $19.00 || 10/31/2007 |
| Emerging Markets (pre-split) || $11.66 || 10/31/2007 |
| Extended Market (pre-split) || $10.50 || 12/31/2007 |
| European || $8.17 || 10/31/2007 |
| Mid-Cap || $7.60 || 12/31/2007 |
| Pacific || $7.52 || 10/31/2007 |
| Total Stock Market (pre-split) || $7.30 || 12/31/2007 |
| Small-Cap Growth || $7.10 || 12/31/2007 |
| Small-Cap || $6.80 || 12/31/2007 |
| Value || $6.70 || 12/31/2007 |
| Large-Cap || $6.60 || 12/31/2007 |
| Small-Cap Value || $6.50 || 12/31/2007 |
| Growth || $6.50 || 12/31/2007 |
| Mid-Cap Growth || $6.50 || 12/31/2007 |
| REIT || $6.13 || 01/31/2008 |
| Dividend Appreciation || $5.60 || 01/31/2008 |
| Mid-Cap Value || $5.30 || 12/31/2007 |
| -- Average || $7.97 || |
| Source: SEC Filings |
Company Press Release
VANGUARD ANNOUNCES SHARE SPLIT FOR THREE EXCHANGE-TRADED FUNDS
VALLEY FORGE, PA, June 4, 2008—Vanguard® Total Stock Market Index Fund, Vanguard Emerging Markets Stock Index Fund, and Vanguard Extended Market Index Fund today declared a 2-for-1 split of their ETF shares. The conventional shares of the funds are not affected by the split.
The share split for Vanguard Total Stock Market ETF (VTI), Vanguard Emerging Markets ETF (VWO), and Vanguard Extended Market ETF (VXF) entitles each shareholder of record at the close of business on June 13, 2008, to receive one additional share for every share of the ETF held on that date. The additional shares are expected to be distributed to shareholders on June 17. The shares will trade at the new split-adjusted price beginning June 18.
The 2-for-1 split will lower the share price of the three ETFs by half of their pre-split level and double the number of outstanding shares. Each of the ETFs currently trades above $100 a share. The split is also expected to at least double the average daily trading volume.
Vanguard Total Stock Market ETF (VTI) and Vanguard Emerging Markets ETF (VWO) are two of Vanguard’s largest and most actively traded ETFs. VTI has net assets of $10.8 billion and features an industry-leading expense ratio of 0.07%. VWO, which has grown to $7.6 billion since its inception in May 2004, has an expense ratio of 0.25%. The average expense ratio of Vanguard ETFsTM is 0.16%, which is less than half the industry average expense ratio of 0.48% (Source: Lipper Inc.).
Vanguard is a leader in the ETF marketplace, offering 37 stock and bond ETFs. Vanguard’s ETF assets have grown 78% over the past year ended April 2008, to more than $50 billion in total assets. Vanguard ranks among the top ETF providers in cash flow, with year-to-date cash flow through May of $8.7 billion.
Vanguard, headquartered in Valley Forge, Pennsylvania, is one of the world’s largest investment management companies and a leading provider of company-sponsored retirement plan services. Vanguard manages more than $1.3 trillion in U.S. mutual fund assets, including more than $390 billion in employer-sponsored retirement plans. Vanguard offers more than 150 funds to U.S. investors and more than 50 additional funds in non-U.S. markets.
# # #
All asset figures are as of May 31, 2008, unless otherwise noted. All expense ratio figures are as of December 31, 2007, unless otherwise noted.
For more information, visit www.vanguard.com, or call 800-662-7447 to obtain a fund prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing.
Vanguard ETF Shares can be bought and sold only through a broker (who will charge a commission) and cannot be redeemed with the issuing fund. The market price of Vanguard ETF Shares may be more or less than net asset value.
Investments are subject to risk. Foreign investing involves additional risks, including currency fluctuations and political uncertainty. Stocks of companies in emerging markets are generally more risky than stocks of companies in developed countries.
Vanguard Marketing Corporation, Distributor.
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