The fund’s index, the FTSE Emerging Markets All Cap China A Inclusion Index, is a market-cap-weighted benchmark representing the performance of large-, mid-, and small-cap companies in emerging markets.1

The fund tracked a transition index since November 2015, while its portfolio managers gradually built exposure to small-cap equities and China A-shares:

Benchmark transition timeline
Effective 9/19/2016Effective 11/2/2015Before 11/2/2015
FTSE Emerging Markets All Cap China A Inclusion IndexFTSE Emerging Markets All Cap China A Transition IndexFTSE Emerging Index


Changes bring enhanced diversification

As of August 31, 2016, the new benchmark represented approximately 3,561 securities from 22 countries, including new exposure to over 1,800 small-cap firms (11% of the index) and over 1,500 China A-share companies (5% of the index).

By adding small-cap equities and China A-shares, the fund becomes the first broad-based, market-cap-weighted emerging markets index fund to offer China A-shares and all-capitalization equity exposure.2

The changes aren’t expected to affect the fund’s expense ratios or trigger capital gains distributions. Improved market conditions have lowered the cost of investing in international small-cap equities, creating an ideal moment to broaden the fund’s investment strategy.

Investing in China A-shares

China A-shares are equity shares in mainland Chinese companies that are traded on the Shanghai and Shenzhen stock exchanges and are only available to foreign investors through regulated programs. China A-shares increase diversification for investors by providing access to mainland Chinese companies.

China is a key emerging economy with the second-largest stock market in the world by market cap. China is also the world’s second-largest economy, accounting for 16% of global gross domestic product (GDP) and a 6.3% GDP growth rate (annualized through the first half of 2016).3

Vanguard believes access to this key market has the potential to offer significant long-term benefits for investors.

Last in a series of international fund transitions

The Emerging Markets Stock Index Fund is the last of four U.S.-domiciled international equity index funds to complete a move to an all-cap strategy, a change that Vanguard announced in June 2015.

Vanguard European Stock Index Fund, including its ETF (VGK) share class, and Vanguard Pacific Stock Index Fund, including its ETF (VPL) share class, began tracking all-cap equity indexes on October 1, 2015. Vanguard Developed Markets Index Fund, including its ETF (VEA) share class, began tracking a new index that includes small-cap and Canadian equities, effective June 1, 2016.

Additional information, including performance returns, weights, and constituent-level data for the former, destination, and transition indexes is available on FTSE’s Vanguard portal.

1 The FTSE Emerging Markets All Cap China A Inclusion Index comprises large-, mid-, and small-cap securities of the FTSE Emerging All Cap Index and the FTSE China A All Cap Index. The weight of the FTSE China A All Cap Index in the FTSE Emerging Markets All Cap China A Inclusion Index will be adjusted by the quota available to international investors.

2Sources: Bloomberg and Morningstar.

3Sources: Quandl, 2015; and International Monetary Fund, 2016.

Notes:

Vanguard ETF Shares are not redeemable with the issuing Fund other than in very large aggregations worth millions of dollars. Instead, investors must buy and sell Vanguard ETF Shares in the secondary market with the assistance of a stockbroker. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.

All asset figures as are of August 31, 2016, unless otherwise noted.

All investing is subject to risk, including the possible loss of the money you invest. Diversification does not ensure a profit or protect against a loss. Prices of mid- and small-cap stocks often fluctuate more than those of large-company stocks.

Investments in stocks issued by non-U.S. companies are subject to risks including country/regional risk and currency risk. These risks are especially high in emerging markets and, in particular, in countries where market controls may impede investment.