Vanguard Group, the second-biggest US mutual fund firm, is its own best customer for VIPERs, exchange-traded share classes based on two of its index funds.
The shares, which represent a basket of stocks and can be bought and sold like individual equities, are listed in the mutual funds' reports to shareholders as "temporary investments" and not as common stocks, said Vanguard spokesman John Demming.
Vanguard also lists cash as a temporary investment.
He said Vanguard uses VIPERs -- Vanguard Index Participation Equity Receipts -- as an alternative to futures contracts. They have lower transaction costs and are more tax-efficient, allowing Vanguard to pass on savings to fund shareholders, he said.
Some analysts say Vanguard should list VIPERs separately among its equity holdings.
"Each holding ought to be labeled really clearly," said Scott Cooley, a senior analyst at Morningstar Inc, a Chicago-based research firm that tracks mutual funds. He added, however, that using VIPERs makes "a world of sense" for Vanguard funds.
A spokesman for the Securities and Exchange Commission, John Heine, had no comment on how Vanguard reports its funds' holdings of VIPERs.
The biggest seller of ETFs, Barclays Global Investors, has about US$18 billion of assets in their so-called iShares.
The San Francisco-based unit of Barclays Plc doesn't own the iShares in its investment portfolios, most of which are institutional, mainly because complex regulations governing institutional funds have made it impractical so far, company spokesman Tom Taggart said.
According to the Investment Company Institute, the fund industry's Washington, DC-based trade association, ETF assets totaled US$82.99 billion as of Dec. 31, up from US$65.59 billion on Dec. 31, 2000.
a major holder
VIPER assets totaled US$1.46 billion as of Jan. 31, Vanguard said. Of the US$1.19 billion in assets that one class of VIPERs -- Vanguard Total Stock Market VIPERs -- had at year end, Vanguard's own funds held US$826 million.
"It's like buying lots of copies of your book to drive it up the best-sellers' list," said Dan Wiener, editor of the Independent Adviser for Vanguard Investors, a newsletter.
Vanguard spokesman John Woerth said Vanguard has disclosed its ownership of the VIPER shares on both its Web site and in fund reports, but ``certainly hasn't touted'' the growth of the exchange-traded shares.
Four Vanguard funds -- Vanguard Equity Income Fund, Vanguard Morgan Growth Fund, Vanguard Windsor Fund and Vanguard Windsor II Fund -- use VIPERs.
Another fund, Vanguard Explorer Fund, is authorized to use them, though it hasn't so far. Wiener said while VIPERs probably rank among the top-10 holdings of one or more of those four funds, Vanguard doesn't list them that way.
Morgan Growth's top 10 holdings represented 22 percent of assets as of Jan. 31, when the fund held 324 stocks.
According to Vanguard's Web site, VIPER shares represented about 2 percent of Morgan Growth's assets as of Nov. 30.
"My very educated guess on this is that the VIPER would easily fit into the top 10 here, but it's not listed as such," Wiener said.
He added that he doesn't oppose Vanguard's use of VIPERs.
In a Securities and Exchange Commission filing last week, Vanguard said it receives no additional revenue from investing fund assets in VIPER shares of other Vanguard funds.
Vanguard Total Stock Market VIPERs, based on a fund that tracks the Wilshire 5000 Total Market Index, began trading on May 31. Vanguard Extended Market VIPERs began trading Jan. 4, and are based on a fund that tracks the Wilshire 4500 Completion Index.
Both trade on the American Stock Exchange.
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