The Vanguard FTSE Emerging Markets ETF (VWO) , the largest emerging markets ETF by assets, will officially begin tracking the FTSE Emerging Index today. Vanguard, the third-largest U.S. ETF issuer, shook the ETF world in October 2012 when it announced it would move some of its popular funds away from MSCI (MSCI) indexes to FTSE indexes. VWO is by far the largest of the funds affected by that announcement.

Through the end of last year, VWO tracked the MSCI Emerging Markets Index, the same index used by the iShares MSCI Emerging Markets Index Fund (EEM) . EEM is the second-largest emerging markets ETF behind VWO. [What Vanguard Index Swap Means For Investors]

Since January, VWO “tracked a custom benchmark, the FTSE Emerging Transition Index, so that the portfolio management team could implement the transition cost-effectively with minimal market impact and negligible tracking error, as well as to enable shareholders to see the fund’s position,” according to a statement by Vanguard.

In terms of country exposure, VWO’s official transition to the FTSE Emerging Markets Index means the ETF no longer features any weight to South Korea. Vanguard has gradually been selling South Korean stocks since the start of the year to match-up with the FTSE index because FTSE does not classify South Korea as an emerging market. [ETF Focus: Emerging Markets]

MSCI does and as such South Korea is the second-largest country weight in EEM behind China. South Korea, Asia’s fourth-largest economy, accounted for 14.2% of EEM’s weight as of June 26, according to iShares data. Year-to-date, both ETFs are down more than 12%.

“The transition of the fund to the FTSE Emerging Index concludes the benchmark changes announced by Vanguard in October 2012 for 22 of its stock and balanced index funds. In January 2013, these funds began moving from MSCI indexes to indexes provided by FTSE and University of Chicago’s Center for Research in Security Prices,” according to the Vanguard statement.

Vanguard FTSE Emerging Markets ETF

ETF Trends editorial team contributed to this post. Tom Lydon’s clients own shares of EEM.

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