“The Vanguard Group says it may be able to cut down on portfolio turnover by switching many of the benchmarks it uses for its mutual funds, stirring considerable debate in the staid world of market indexing,” writes Mark Hurlburt, in Sunday’s New York Times.

“In its domestic equity funds, Vanguard has relied heavily on indexes from Standard & Poor’s. But Vanguard recently signed a licensing agreement with Morgan Stanley Capital International, a major provider of international stock indexes. Under that agreement, Vanguard could model its mutual funds on a family of domestic equity indexes that MSCI says it will introduce early next year. Shareholders of eight Vanguard Funds are voting on a proposal to give Vanguard permission to make these changes.”

“Gus Sauter, managing director of the Vanguard quantitative equity group, said that even if Vanguard switched to MSCI indexes for some of its funds, it would not be changing the benchmark for its best-known index fund, the Vanguard 500 Index, based on the S.& P. 500.”

“In any case, Mr. Sauter said, Vanguard is not trying to retaliate against S.& P. for blocking it from extending its use of S.& P. indexes to an array of new exchange-traded funds. Instead, he said, Vanguard is just looking for better indexes. In a recent article in The Journal of Indexes, he proposed guidelines for constructing an ideal index. MSCI’s new ones, he said, satisfy some, though not all, of his guidelines.”

“For its part, MSCI is acting in response to a ‘genuine need’ on the part of fund managers like Mr. Sauter, according to Khalid Ghayur, MSCI’s global director of research.”

“But Lawrence Tint, the former vice chairman of Barclays Global Investors, the world’s largest provider of index funds, said he thought that MSCI — as well as the other index providers — mainly wanted to control a big piece of the market. ‘That’s what this is all about,’ Mr. Tint said.”

“Demand for indexes is growing, especially with the proliferation of exchange-traded funds and derivative products based on indexes. Still, the market looks overcrowded. Other important indexes are offered by Dow Jones & Company, the Frank Russell Company, Wilshire Associates and, as of this spring, Morningstar Inc.”

“Neither Mr. Ghayur nor Mr. Sauter would say that MSCI’s new indexes were likely to diverge significantly from the others in measuring market movements. But they say the MSCI indexes have advantages.”