By issuing exchange-traded shares of the Vanguard Total Stock Market Index Fund last Thursday, the Vanguard Group of Malvern, Pa. may have compromised its brand name and reputation of being a product innovator, not a product marketer, according to some industry observers.

"What's important [about last] Thursday is that it is an affirmation that Vanguard has turned into a marketing operation," said Daniel P. Wiener, editor of the monthly newsletter, The Independent Adviser for Vanguard Investors. "They are responding to the competitive threat of ETF's and they've got to stake their claim. The ETF train pulled out of the station and they weren't on it and they are trying to catch up."

The new VIPER (Vanguard Index Participation Equity Receipts) share class is also significant because it clearly indicates that John Bogle is no longer running the company, Wiener said.

"Vanguard has become a marketing machine under Jack Brennan," he said. "This is a Jack Brennan initiative."

The growing demand and popularity of exchange-traded funds probably is the reason Vanguard has decided to issue an exhange-traded share class, said Dennis Dolego, director of research for Optima Group of Fairfield, Conn.

"They have tended to be more market responsive in some areas where Bogle would not have been," he said. "Traditionally, Bogle has been one to support long-term investing and decry fund supermarkets for encouraging overly active trading. If you look at ETF's as a trading vehicle, he would denounce them. I don't think Bogle would have taken this step."

However, while some may say that Vanguard is following a market trend in issuing VIPERs, its timing in issuing the product is perfect, Dolego said.

"It's a recognition of the growing demand for ETF's and the potential value for certain investors using the ETF approach versus the traditional mutual fund approach," he said.

Exchange-traded fund assets surged between 1999 and 2000, growing from approximately $15 billion at the beginning of 1999 to $65.6 billion at the end of 2000, according to the Investment Company Institute of Washington D.C. Combined assets in exchange-traded funds amounted to $73.3 billion at the end of April, according to the ICI.

Last week's VIPER offering comes after lengthy delays in issuing the product resulting from a legal battle with McGraw-Hill Companies of New York over a licensing agreement with its subsidiary, Standard & Poor's, also of New York. Vanguard initially wanted to attach VIPERs to its S&P 500 fund and its other S&P funds.

In its complaint against Vanguard, McGraw-Hill claimed that Vanguard had to renegotiate its licensing agreement with S&P in order to use its indexes in association with VIPERs because the share class would represent a distinct product. Alvin Hellerstein, a U.S. District Court judge, ruled in favor of McGraw-Hill in late April, postponing the development of the VIPER share class on those funds indefinitely.

The new shares, called Vanguard Total Stock Market VIPERs, track the Wilshire 5000 Total Market Index and will carry an annual expense ratio of 0.15 percent, according to Vanguard.

The Total Stock Market Index fund is the first in a series of funds to which Vanguard plans to attach the new share class, said John Demming, a company spokesperson. Vanguard currently has SEC approval to attach the VIPER share class to its Value Index, Growth Index, Total Stock Index and Small Cap Index funds, Demming said.

All of the effort that Vanguard has put into issuing VIPERs could come back to bite it, said Mercer Bullard, founder and CEO of Fund Democracy LLC of Chevy Chase, Md. and former assistant chief counsel at the SEC's division of investment management.

Vanguard's brand name is predicated on its ability to provide the lowest cost products, he said. The annual expense ratio of 0.15 percent on the Total Stock Market Index Fund's VIPER share class is not cheaper than similar exchange-traded funds offered by Barclays Global Investors of San Francisco, he said.

"They've already conceded defeat on price alone," Bullard said.

Even though the costs associated with the VIPER share class would allow Vanguard to drop the expense ratio much lower than 0.15 percent, Vanguard is probably reticent to do so because it does not want to cannibalize its Admiral share class, which also carries a 0.15 basis point expense ratio, Bullard said.

"Vanguard has the only brand in the mutual fund industry in the sense that a name is associated with a particular product type and that's the low-cost product," Bullard said. By issuing VIPERs that are not the lowest costing exchange-traded product, Vanguard runs the risk of diluting its brand strength, he said.

It is also not entirely clear what market segment will be attracted to the new share class, according to Wiener.

Vanguard has said it wanted to issue the VIPER share class as a means of drawing market timers out of its funds. But that is disingenuous because Vanguard's policy requiring all trades to be conducted through the mail make it virtually impossible for market timers to move in and out of its funds, Wiener said.

"That was a red herring," he said. "Any market timer who has any sizable assets will not move them around in VIPERs because Vanguard index funds are only tradable via mail."

And there are no compelling reasons for existing shareholders in Vanguard's Total Stock Market Fund wanting to switch over to the new shares, Bullard said. If a shareholder has over $150,000 in assets invested in the fund, chances are good that they own Admiral shares, which are as inexpensive as VIPERs.

And any cost advantage VIPERs offers over the fund's investor share class is mitigated by a $50 conversion fee and brokerage costs associated with executing trades, he said.

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