Vanguard Drops the Gloves

It’s not easy to make a splash in the crowded ETF space these days. Many of the new products we’ve seen in the last year or so have been clones of existing ETFs or exotic specialty funds. Any Canadian investor who wants to build a diversified portfolio with ETFs has more than enough choice already.

That was the challenge for Vanguard Canada when they announced they’d by launching a family of ETFs this year. Given the company’s reputation for rock-bottom fees, there was a lot of speculation about whether they would try to compete on price. Even if none of their ETFs is radically different from their competition, they could grab some market share from their competitors by offering similar products with much lower fees.

Well, Vanguard has just released the costs of its new ETFs, which will start trading in the coming weeks. It looks like they’ve lived up to that promise:

Ticker Fee
Vanguard MSCI Canada VCE 0.09%
Vanguard MSCI U.S. Broad Market (CAD-hedged) VUS 0.15%
Vanguard MSCI EAFE (CAD-hedged) VEF 0.37%
Vanguard MSCI Emerging Markets VEE 0.49%
Vanguard Canadian Aggregate Bond VAB 0.20%
Vanguard Canadian Short-Term Bond VSB 0.15%

.

Note that the above figures are the management fees, not the entire management expense ratios (MERs). According to the press release, “Vanguard expects the MERs of its ETFs to be substantially similar to their management fees, as the Vanguard ETFs should incur only nominal other costs that would be included in the MER calculation.” They will have to add GST/HST, which would bring a 0.20% fee up to about 0.23%.

Even if you add a few basis points for taxes, these are very competitive fees: in fact, all of them are lower than comparable products from iShares, Claymore and BMO. The Vanguard MSCI Canada (VCE) will be the second-cheapest ETF in Canada, behind only the Horizons S&P/TSX 60.

I would suggest that Vanguard has now changed the game in the Canadian ETF market. Any bank or other financial institution that is planning to launch a family of broad-based ETFs will likely find there is no way to compete: it was hard enough to go against iShares, and now the pricing pressure is all but insurmountable. Any new players will probably stick to specialized products, wrap programs, or some other strategy to package and sell ETFs through advisors.

In other news…

We’ve just updated the Model Portfolio performance results for the period ending October 31. The year-to-date performance of the Complete Couch Potato is 1.28%—hardly cause for dancing in the streets, but given the state of the global economy and the extreme daily volatility, that’s a surprising result. Have a look at the five-year performance numbers of the major asset classes: with a couple of exceptions, these are not nearly as bad as you might think considering this period includes the 2008–09 financial crisis and this summer’s huge declines.

Many thanks to everyone who attended or tuned in to the ING DIRECT panel discussion on Wednesday evening. I enjoyed meeting the readers who came by to say hello in person, including Mike from MoneySmarts, and hearing from those who Tweeted their comments. It was an honour to share the stage with Rubina Ahmed-Haq and Ellen Roseman. Preet Banerjee was also present.

38 Responses to Vanguard Drops the Gloves

  1. Canadian Capitalist November 10, 2011 at 11:19 am #

    This is great news indeed! VCE and VSB will find a place in my personal portfolios. Well done Vanguard! Now let’s see a low-cost REIT ETF, a low-cost dividend ETF and some currency unhedged foreign ETFs.

  2. Mike Holman November 10, 2011 at 11:34 am #

    Nice work on the panel discussion – it was good to finally meet you in person.

  3. Andrew F November 10, 2011 at 12:27 pm #

    Still no love for Preet.

  4. Craig G November 10, 2011 at 1:35 pm #

    Will you be updating your model portfolios with these new ETFs? I suppose we don’t know exactly the holdings yet since the funds don’t have a prospectus online but I’m guessing VCE 20% VUS 20% VEF 20% and VSB 40% would be roughly equivalent to your global couch potato portfolio?

  5. Superior John November 10, 2011 at 2:13 pm #

    The 1.28% year to date performance of the Complete Couch Potato, does this include dividends paid during this period of time? Thanks for keeping us up to date on the Vanguard’s entrance into the market. Keep up this great site and invaluable info.

  6. Canadian Couch Potato November 10, 2011 at 3:04 pm #

    @Mike: Thanks, and great to meet you as well.

    @Craig: I may update the Model Portfolios at some point, but not until the new ETFs are at least a year old. I wouldn’t be in a huge rush to switch from iShares: incurring trading fees and perhaps taxes to save a few basis points is not a major priority. But for a new investor, yes, your suggested breakdown would be an excellent choice. Note, however, that the VUS and VEF use currency hedging, while XWD does not.

    @Superior John: Yes, all the performance numbers include dividends and interest payments, so they represent your total return.

  7. Charles Chase November 10, 2011 at 4:09 pm #

    Compelling, but I wish VUS and VEF had unhedged versions. I guess they expect Canadians who want unhedged versions will buy the existing US dollar ETFs.

    For people who do want their foreign equity hedged those fees are very low.

  8. Albert November 10, 2011 at 4:24 pm #

    @Canadian Couch Potato — It would great to have updated model portfolio with these ETFs since I will be switching soon from an actively managed fund to ETFs. Can you reconsider the 1-year wait?

  9. Canadian Couch Potato November 10, 2011 at 4:28 pm #

    @Albert: The funds have not even been launched yet. If you want to use the Vanguard ETFs to build a Global Couch Potato, you can use the breakdown that Craig G mentions above.

  10. Erin November 10, 2011 at 4:29 pm #

    Do you know if the vanguard funds will be available at a variety of brokerage houses? (e.g., RBC action direct?)

  11. Canadian Couch Potato November 10, 2011 at 4:38 pm #

    @Erin: The Vanguard ETFs will be available from all brokerages.

  12. John m November 10, 2011 at 5:14 pm #

    Great post……..following regularly (but passively)
    Question: Will any of these funds carry a yield? Do Vanguard products generally carry dividends?
    Thanks for keeping indexers informed.
    John m

  13. Canadian Couch Potato November 10, 2011 at 6:50 pm #

    @John M: Welcome aboard. According to prospectus, the bond ETFs will pay interest monthly, VCE and VUS will pay dividends quarterly, and the two international ETFs will pay them annually.

  14. My Own Advisor November 11, 2011 at 7:47 am #

    No love for Preet indeed. When is Preet going to put on the gloves and reply? 🙂

    Good update Dan.

    For my registered portfolio, I think I’ll keep XIU and XBB. Over time, new money will likely buy VCE and VSB. I won’t be buying the CDN-hedged products. I’m not convinced over a 20-year+ holding period, hedging is an advantage.

    Have a great weekend!

  15. Darnell November 11, 2011 at 9:27 am #

    I have a portfolio of ishares and vanguard funds which I made based on the model portfolios at the time.

    Should I be contantly re-evaluating the funds and considering switching when better products like this one are offered? Or just investing new money in these new funds and then holding two of the same type of fund? I guess I understand that these new funds are attractive because of lower fees, and that a new investor may choose these funds, but how should this information apply for an investor that already has 100k in their portfolio?

    Thanks!! Great blog!

  16. Canadian Couch Potato November 11, 2011 at 9:40 am #

    @Darnell: Thanks for a great question. In my opinion, you definitely should not be jumping into every new fund that comes along just so you can save a few basis points. The cost of the commissions will outweigh the savings in MER much of the time. As you suggest, it’s usually better to switch things gradually, such as when you were going to add money or rebalance anyway.

    Michael James just wrote a good post about this:
    http://michaeljamesmoney.blogspot.com/2011/11/strategy-with-vanguard-etfs.html

    Remember, too, that a new fund with a lower MER may still have a higher tracking error than a well-established fund with a slightly higher fee. I don’t expect this to be a problem with Vanguard, but it still makes sense to wait and see.

  17. Andrew F November 11, 2011 at 9:47 am #

    I don’t think that this means you should run out and switch funds every time a new one comes along. Realistically, the difference in MER is very small. You may want to make new purchases with the new funds, and when rebalance, sell the old one (assuming you are in a registered account and can ignore capital gains implications). One interesting thing to note is that you can use these funds for tax loss harvesting.

  18. Mike Holman November 11, 2011 at 10:00 am #

    @Andrew, @My Own Advisor I went for a beer with Dan and Preet after the panel and I can tell you it was horrible.

    The constant bickering, crying and I even had to separate the two of them several times.

    You’d think a couple of respected financial journalists would be more mature, but that wasn’t the case.

    Never again!!

  19. Chuck November 11, 2011 at 9:45 pm #

    Hi Dan,

    Really enjoy reading your Couch Potato blog and appreciate the terrific advice you kindly provide.

    I have a few questions about the Vanguard ETFs being introduced in Canada.

    There have been comments from readers about the benefits of hedged vs unhedged ETFs (to the C$).

    My question is regarding the foreign withholding tax on US ETFs for Canadians. How does this affect this issue the issue of hedging? Is it still better to hold Vanguard US ETFs vs the new CDN ETFs that are being offered?

    And if you are purchasing a hedged ETF, is there a better time to buy the hedged version? Is it better to make the purchase when the C$ is higher or lower compared to the US$?

    I apologize for asking naive questions.

    Thanks again.

    Chuck

  20. Canadian Couch Potato November 11, 2011 at 9:58 pm #

    @Chuck: There are no naive questions, only investors too shy to ask. 🙂

    The currency hedging has no effect on withholding taxes. What’s important is whether the ETF trades in the US or Canada. In a taxable account or a TFSA, you will pay the withholding tax whether you hold the US or Canadian version of the Vanguard ETF. However, if you hold the US-listed version in an RRSP, then you will be exempt from the tax:
    http://canadiancouchpotato.com/2010/01/24/should-you-buy-us-listed-etfs/
    http://www.canadiancapitalist.com/how-withholding-taxes-affect-the-choice-of-international-investments/

    If the Canadian dollar rises, then you would want to be holding the hedged version. When the US dollar rises, a Canadian is better off holding the unhedged version. Of course, no one can predict currency movements in advance. I feel that using unhedged fund makes more sense for long-term investors because it is cheaper and it improves diversification.
    http://canadiancouchpotato.com/2010/10/29/to-hedge-or-not-to-hedge/

    Hope this helps.

  21. Chuck November 11, 2011 at 11:16 pm #

    That certainly helps!

    Thanks Dan not only for your kindness and openness to sharing your knowledge, but for your clarity, ability to simplify, and humanity.

    You are a wonderful teacher.

  22. HOWARD November 12, 2011 at 12:44 pm #

    What’s with your attitude about Preet Banerjee?

  23. Canadian Couch Potato November 12, 2011 at 1:05 pm #

    @Howard: All in fun — Preet and I are good friends. 🙂

  24. Maxwell C. November 12, 2011 at 5:49 pm #

    I’m still holding out for the same thing in a mutual fund 😉

  25. Superior John November 12, 2011 at 6:55 pm #

    Dan just list all your friends as a sidebar so the tongue ‘n cheek you have fun with will be understood by all. Keep up the great work.

  26. Dean November 13, 2011 at 9:05 pm #

    Thanks for the update Dan. I was hoping these funds would come out before I moved my cash into ETFs. I’m not sure about the hedged funds either personally. As someone who plans on spending more or less equal amounts of time in both countries during retirement, and who will have to purchase all equity ETFs in non-registered accounts, I think I will just stick with the unhedged ETFs trading in US markets (VTI & VEA). Preet once pointed out that US Estate Tax rules apply to US-listed ETFs though, so this could potentially be a benefit to holding these new Vanguard hedged ETFs.

  27. Russ November 14, 2011 at 6:54 am #

    @ Dean: Thanks for bringing up US Estate taxes here. As I recall, the threshold for falling under US tax reporting in this case is US$60,000. My thought, then, is to buy VTI and VEU (in my case) up to a total of $60,000 and use Canadian domiciled ETFs to bring the US and International allocations up to their desired levels. Having a portion of my non-Canadian equities currency-hedged and a portion un-hedged feels right, too.

  28. Paul G November 15, 2011 at 2:21 am #

    I have to wonder if VCE + XCS might wind up being a decent combination to cover the entire Canadian market. XIC (or XIU + XMD) can’t really be matched with XCS since there’s overlap. I’m guessing VCE+XCS will leave a bit of a gap in coverage for the mid-range of XMD…. (the high-end being part of VCE and the low-end part of XCS).

  29. Canadian Couch Potato November 15, 2011 at 10:43 am #

    @Russ and Dean: I am preparing a post about US estate taxes, so stay tuned. It’s a complicated topic!

    @Paul G: There’s nothing wrong with using both XIC and XCS. There is some overlap, but the whole point of using XCS is to overweight small caps, so overlap is fine. We’ll have to wait to see what the components of VCE are, but I would think an equal mix of VCE and XCS would be a reasonable way to get a small-tilted Canadian portfolio.

  30. Rob November 16, 2011 at 12:05 pm #

    Another excuse to swap into the vanguard is if you want to do some tax loss selling at year end. ie: sell XIU and buy VCE. This way you stay on side with the canada revenue agency, drop your MER and get a tax benefit.

  31. Think Dividends November 18, 2011 at 10:12 am #

    Wow… The Vanguard MSCI Canada ETF is only charging 0.09%… That’s cheap… In the United States, the iShares MSCI Canada Index Fund (EWC) charges an MER of 0.53% to follow the same index…

  32. Pacific November 27, 2011 at 5:06 pm #

    QUOTE: Thanks Dan not only for your kindness and openness to sharing your knowledge, but for your clarity, ability to simplify, and humanity.
    END QUOTE.

    Ditto for me.

  33. Andres November 3, 2013 at 11:22 am #

    Hello…
    What could i use to replace XCS on tax loss selling.
    Any Vanguards that would qualify!

    Thanks

  34. Canadian Couch Potato November 3, 2013 at 12:57 pm #

    @Andres: There really is no ETF equivalent to XCS. It’s the only small-cap ETF in Canada.

  35. Andres November 3, 2013 at 3:19 pm #

    I found on another site i could use XMD as a possible alternative at least for 1 month.

    Thks

Trackbacks/Pingbacks

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