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Vanguard's decision in October to switch its underlying index benchmarks from MSCI to the CRSP indices (for US exposure) and FTSE indices (for international) was a very significant one for the wealth management industry. The assets in Vanguard mutual funds and ETFs tracking these indices are in the range of $500Bn, impacting a large number of investors.

We decided to take a deeper dive starting with the US benchmark switch, to see if the new indices have a very different risk profile. If they do, it would imply that Vanguard has effectively changed the type of exposure and therefore the likely return premiums that investors would capture in the future.

We used the Fama-French 3-factor model to compare each pair of index benchmarks. For each index, we ran a linear regression against the 3 risk factors using historical returns since 2003. The risk factors were measured as follows:

· Market factor: Russell 3000 Index Returns

· Size factor: Russell 2000 Returns - Russell 1000 Returns

· Value factor: Russell 3000 Value Returns - Russell 3000 Growth Returns

There is never universal agreement on the correct way to measure the 3 risk factors. We decided to use the Russell indices since their value definition is based on book/price (mirroring Fama-French) and their indices are widely used for benchmarking due to their breadth. The table below shows a summary of our results:

Vanguard ETF Benchmark Switch: 3-Factor Loadings





Total Market


MSCI Broad Market




CRSP Total Market




Mid Cap






CRSP Mid Cap




Small Cap


MSCI US Small Cap




CRSP Small Cap




Key Findings

In all cases we found a very high fit, generally around 98%, suggesting that these 3 risk factors explained the historical returns of each of the indices.

Total Market

As one would expect in the case of broad equity indices, both the MSCI Broad Market and the CRSP Total Market Indices had a market beta very close to 1. Neither index showed significant size or value tilts, and differences on these dimensions between the indices were not meaningful. So in practical terms, most retail investors will probably not see a significant impact from this benchmark switch in the total market space.

Mid Cap

We did however observe some differences in the Midcap space. The MSCI US Midcap Index shows more of a small cap tilt relative to the CRSP MidCap index. The MSCI MidCap index goes deeper into the market structure and holds smaller stocks than the corresponding CRSP Index.

Small Cap

In the case of small caps too we found that MSCI's indices showed a significantly higher small cap exposure than the corresponding CRSP Indices. A 1% increase in the size risk factor (i.e. difference between the Russell 2000 and 3000 Indices) would result in a 0.964% annual return differential between these two indices.

In summary, Vanguard's switch from MSCI to the CRSP Indices does not significantly change the risk characteristics of the relevant Vanguard ETFs in the total market space. However in the mid and small cap space, the new CRSP indices have a much smaller exposure to the size risk factor. If the small cap space significantly outperforms large cap over the next few years, this could result in the new Vanguard funds underperforming their previous underlying index benchmarks.

(Note: Click here to get our worksheets and regression output)

Source: Vanguard's Benchmark Index Switch: Risk Implications