Vanguard to Offer Tradeable Versions of Its Popular Index Funds

Vanguard, which dominates traditional index funds, is moving into the exchange-traded fund business, and soon will offer versions of the firm's most popular indexes that can be easily traded by active investors.

The move comes as another indexing powerhouse, Barclays Global Investors, is preparing to launch a slew of the exchange-traded funds in the coming weeks. Competition between the world's two biggest indexers could drive down costs for all index-fund investors.

Vanguard's exchange-traded shares -- called VIPERs for Vanguard Index Participation Equity Receipts -- will be launched as new share classes of nine existing index funds, only five of which will be offered initially: (VFINX Quote)500 Index fund, (VTSMX Quote)Total Stock Market Index, (VIGRX Quote)Growth Index, (VIVAX Quote)Value Index and (NAESX Quote)Small-Cap Index. The funds will trade on the American Stock Exchange.

Unlike traditional mutual funds, exchange-traded funds are priced throughout the trading day and can be bought and sold like stocks. Their popularity has posed a threat to traditional index funds, the core of Vanguard's business. Exchange-traded index funds now command about $38 billion in assets. Vanguard currently has $240 billion in index assets under management. ...