Salim Ramji makes appeal to shareholders of two Vanguard index ETFs to re-classify them as 'non-diversified' -- to keep them diversified, but not 'synthetically'

An earlier version of this article stated the Ramji letter was sent Oct. 25th. It was actually sent on Aug. 25.

Salim Ramji is lobbying shareholders in a bid to re-label indexed ETFs as “non-diversified” to stay within the holdings dictated by their MSCI indexes without doing derivative backflips.

The Vanguard CEO wrote the letter, dated Aug. 25, 2025, with his headshot ahead of the Tuesday Nov. 4 vote.

With the header “An important message from CEO Salim Ramji,” it asks shareholders to approve proposals to switch the Vanguard Financials (VFAIX and VFH) and the Vanguard Health Care Index Funds (VHCIX and VHT) from "diversified' to "non-diversified" to eliminate each funds' related fundamental investment restriction. 

The purpose, Ramji explains, is “to allow each fund's portfolio managers to directly track each fund's [MSCI] benchmark index without incurring additional expenses.”

A Vanguard press release on Aug. 25 largely went unnoticed by media, and did not mention the downside of higher fund expenses.

Asked what “additional expenses” Vanguard incurs currently to stay true to the benchmark without running afoul of the Securities and Exchange Commission (SEC), a spokesman replied:

“The funds have continued to tightly track their benchmarks through synthetic exposure such as swaps, which comes at additional expense to the funds." 

“Converting the funds to non-diversified status will allow them to track their benchmark indexes more efficiently by enabling them to invest in index constituents directly in the same proportion as their weightings in the benchmarks,” he said. 

Defining diversification

Vanguard's need to petition investors comes down to shifting economic ground while the 85-year-old SEC rules remained unchanged, according to Jeff DeMaso, publisher of the Independent Vanguard Adviser newsletter.

“Here’s the issue: Under the Investment Company Act of 1940, which defines the rules for mutual funds (and ETFs), a 5% position is a large holding,” he writes by email in response to an RIABiz query. 

"If 25% of a mutual fund's assets are invested in those large holdings, it is no longer diversified.

“Thanks to today’s market concentration—think mega-cap health care and financial stocks—those index funds are at risk of violating that technical definition of diversification.”

In early 2025, the 10 largest companies in the S&P 500 accounted for 37.3% of the index's total market capitalization. More than 75% of U.S. industries have seen an increase in concentration over the last two decades.

Vanguard Financials Index Funds' top three holdings are JPMorgan at 10.01%, Berkshire Hathaway at 7.78% and Masterdcard at 5.56%, according to Yahoo data

In other words, Vanguard is making the right move on behalf of shareholders, DeMaso, an occasional Vanguard critic, says.

"So, Vanguard is simply gathering the votes it needs to update the paperwork to acknowledge that possibility. If they get the votes, the funds will continue to track their indexes as they have always done."

Regulatory threats

Only shareholders of the funds as of the record date, Aug. 26, 2025, will be invited to cast their votes 

It's also not the first time that Vanguard has had to take evasive action to maintain the purity of its indexes, without driving up costs by doing backflips with derivatives to stay compliant with a regulator.

The FDIC threatened tighter regulations to curb the proxy voting power of passive fund managers, Vanguard included, that would ban more than 10% ownership of any domestic banking stock.

Vanguard evaded that edict by agreeing to forgo voting its outsized proxy power. See: Vanguard scores quick non-aggression pact with FDIC by surrendering proxy powers but analyst asks: ‘Why die on that bridge?’