With more exchange-traded fund providers stepping up in an escalating price war, Vanguard fired another shot across the bow. The firm appears strongly committed to being the lowest-cost ETF provider and is responding to moves from rivals Charles Schwab and BlackRock's iShares.

Vanguard's latest decision to switch over to FTSE indices from MSCI benchmarks in its international ETFs should help cut costs and lower fees for investors. Vanguard apparently negotiated a better deal to license FTSE indices.

ETF providers often compete for the same areas of the market, issuing fund products that cover similar sectors or regions and even offer products that track the same benchmark indices. Vanguard's decision highlights the need for advisors to understand how index-based ETF products are structured.

Though exchange-traded funds try to reflect the performance of an underlying index, they do not hold every single security included in those indexes. Instead, they employ a sampling technique to mimic the whole index. That allows investors to gain access to a portion of the overall market or serve as a baseline of comparison for active investment strategies trying to beat those indexes.

For example, the MSCI emerging market index is a highly observed benchmark for emerging market stocks. ETF traders look at the iShares MSCI Emerging Markets (EEM) or the Vanguard Emerging Markets ETF (VWO) to gain exposure to the underlying MSCI emerging market index.

Citing cost savings as the primary reason, Vanguard decided to transition away from those MSCI indices. This has brought the price battle in the emerging markets arena to a new level.

The decision was a "huge win for us," Jonathan Horton, the president of FTSE North America, told me at a recent Morningstar conference. It is "transformational for the index industry and we think transformational for the ETF marketplace."

VWO is the cheaper option, with a 0.20% expense ratio, while the EEM has a 0.67% expense ratio. Moreover, at an average 0.17% expense ratio compared with the industry average of 0.55%, Vanguard ETFs are already among the cheapest. The firm's latest decision to switch to cheaper indices will give it another leg up as it hopes the lower indexing fees will transfer to its clients.

While advisors will always consider the fees, the underlying index also serves as a major deciding point. For instance, the FTSE Emerging index is constructed differently than the MSCI Emerging Markets index.

Looking at sector allocations, the FTSE Emerging Markets' top sectors include banks (18.8% of holdings), oil and gas (14.1%), telecommunications (8.5%), basic resources (8.9%) and technology (6.7%). By comparison, the MSCI Emerging Markets Index's top holdings include financials (24.9% of holdings), information technology (14.0%), energy (13.1%), materials (12.0%) and consumer staples (8.5%).

Also, the country allocations are different. The FTSE Emerging Index's top country allocations include China (which has 16.7% of holdings), Brazil (16.1%), Taiwan (13.2%), South Africa (10.6%) and India (9.6%). The MSCI Emerging Markets Index's top country weightings, meanwhile, include China (17.4%), South Korea (15.6%), Brazil (12.6%), Taiwan (11.1%) and South Africa (7.9%). Right off the bat, advisors will notice that South Korea is the key difference between the two indices in terms of country allocations -- FTSE counts South Korea as a "developed market" and does not include the country in its emerging markets index, whereas MSCI sees South Korea as an "emerging market." Additionally, the FTSE group also further sub-categorizes emerging market economies as "advanced" and "secondary" emerging markets.

While the difference between the two indexing methodologies may translate to a couple of percentages here and there, the differences do add up. For instance, the MSCI Emerging Market Index has gained 4.8% over the past three months, increased 8.9% year to date, risen 12.9% over the past year and added 2.02% over an annualized three-year period. By comparison, the FTSE Emerging Index is up 7.7% over the past three months, is 11.5% higher year to date, has increased 15.9% over the last year and has risen 5.6% over an annualized three-year period.

It will be up to the advisor to determine which index offers the optimal exposure to a specific market since the Vanguard move would mean that investors can't compare ETFs based on costs alone anymore. Moreover, the ETF industry's relationship with index providers may be on the precipice of further change since the FTSE/Vanguard deal could portend a new trend.

When asked if other ETF providers are lining up behind Vanguard, Horton stated, "We've had positive reaction across our client base."

However, many institutional investors and endowment plans must use MSCI indices for their international benchmarks as part of their mandates, which may cause some large investors to drop the reconstituted Vanguard ETFs for iShares ETFs benchmarked to MSCI international indices. We will have to wait and see if the policies on the institutional side will be enforced, in which case some large investors will have to shift assets away from the Vanguard options and into iShares funds, or if, instead, the current policies will be amended to include FTSE indices.

As with any other investment, advisors should delve deeper into ETFs to discern the subtle nuances among the indexes. Just because two ETFs sound similar does not mean they will perform exactly the same.

Full disclosure: Tom Lydon's clients own EEM.