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Vanguard Readies ETF to Track Wilshire 4500

Ian McDonald

Still stymied in its efforts to launch exchange-traded shares tracking the S&P 500 index, index-fund titan Vanguard plans to slap an exchange-traded share class on the (VEXMX)Vanguard Extended Market Index fund in September.

Vanguard filed paperwork with regulators Friday registering the new Vanguard Extended Market VIPER share class (short for Vanguard Index Participation Equity Receipts). The fund tracks the primarily small- and mid-cap Wilshire 4500 Index, and VIPER shares will trade on the American Stock Exchange. Index-fund guru Gus Sauter has run the fund since its 1987 inception.

This will be the firm's second exchange-traded fund share class. The first, the Vanguard Total Stock Market VIPER (VTI) which tracks with Wilshire 5000 Index, launched at the end of May. Due to a licensing beef with Standard & Poor's parent McGraw Hill, the firm has yet to launch ETF shares for its flagship (VFINX)Vanguard 500 Index fund. The Extended Market Index fund would complement an S&P 500 fund, because the mostly small- and mid-cap Wilshire 4500 Index essentially replicates the entire U.S. market, excluding the stocks in the mostly large-cap S&P 500.

The new share class' expense ratio isn't set yet. The fund's traditional share class levies a 0.25% annual toll, which is well below the 1.34% charged the by fund's average mid-cap blend peers, according to Morningstar.

Unlike traditional mutual funds, ETFs price throughout the trading day and trade like stocks on an exchange. Their popularity is a potent threat to traditional index mutual funds, where almost 40% of the $255 billion invested in S&P 500 Index funds sits in Vanguard's coffers, according to Lipper. The Standard & Poor's Depositary Receipts(SPY), an ETF that tracks the S&P 500, and the Nasdaq 100 Trust(QQQ), an ETF tracking the Nasdaq 100 Index, are among the largest 25 funds in the nation with more than $50 billion combined assets, according to Lipper. (For more details on ETFs, check out this primer.)

Because ETFs price throughout the day, unlike traditional fund shares that price only at the end of trading, they offer investors more flexibility but might be better suited to gunslinging traders than buy-and-hold investors. While their structure also provides for lower fees, investors have to pay a broker's commission to buy or sell shares. Consequently, they're often more cost-effective for institutional or individual investors buying shares in lump sums than more modest individuals investing a set amount each month. Sauter and other ETF experts debated the cost advantages of ETFs at the 2001 Morningstar Investment Conference in Chicago last week.

The Extended Market Index fund's traditional shares have posted a 13.6% annualized gain over the past 10 years, which is about even with its peers and lags the S&P 500 by 1.2 percentage points according to Morningstar.

Junk Pile

In my notes from last week's 2001 Morningstar Investment Conference, I pointed to a couple of Janus managers' attendance as a sign of how much life has changed since the Nasdaq's collapse, because these folks weren't typically chatty in headier days. This omitted (JAMRX)Janus Mercury fund skipper Warren Lammert's presentation at last summer's conference, when things were already less than sunny. Turns out John Schreiber and Jason Yee, the two Janus managers at this year's conference, turned up because they were at a conference across town, the fund family said.