Vanguard Announces Five New ETFs

When I spoke with Vanguard’s managing director Atul Tiwari back in June, he said the company would be announcing a new suite of ETFs in the coming months. That announcement arrived late yesterday afternoon: Vanguard will launch five new ETFs before the year is out.

Right now, all we know is the names of the funds and the indexes they track, but that’s enough to get a good idea of their strategies. Here’s my take on the new funds and where they fit in the Canadian ETF landscape:

Vanguard FTSE Canadian High Dividend Yield. No surprise here given the giddy popularity of dividends in recent years. Assuming this new ETF will use a strategy similar to that of the Vanguard High Dividend Yield (VYM), which also tracks a FTSE index, it will focus on stocks with above-average current yields rather than dividend growth. With that in mind, I’d guess it’s likely to be closer to the iShares S&P/TSX Equity Income (XEI) than to any other competitor. The management fee is 0.30%.

Vanguard FTSE Canadian Capped REIT. This real estate fund will go head-to-head with the iShares S&P/TSX Capped REIT (XRE), and with a management fee of 0.35% it’s 20 basis points cheaper. It will track a new benchmark called the FTSE Canada All Cap Real Estate Capped 25% Index, which is a bit of a mouthful. The term “All Cap” suggests the index will include some of the smaller REITs that are excluded from XRE, and the “Capped 25%” indicates that no company can make up more than 25% of the index. That’s significant, because the giant RioCan has occasionally challenged that limit: it currently makes up 21.5% of XRE, which also imposes a 25% cap. I would have preferred a 10% cap to prevent one or two companies from dominating. That’s the reason my Complete Couch Potato uses the BMO Equal Weight REITs (ZRE), which includes 18 REITs with only 5.5% assigned to each.

Vanguard Canadian Short-Term Corporate Bond. This one seems pretty straightforward: it will track a Barclay’s index of corporate bonds with maturities of one to five years. It will face off against the hugely popular iShares 1-5 Year Laddered Corporate Bond (CBO), which has $1.4 billion in assets, the iShares DEX Short Term Corporate Universe + Maple Bond (XSH), and the BMO Short Corporate Bond (ZCS). The Vanguard ETF will trump all of them in costs with a fee of 0.15%.

Vanguard S&P 500 Index ETF S&P 500. Finally, a Canadian ETF that tracks a traditional US stock index without currency hedging. It’s hard to believe this has been so long in coming. (Currently the only other unhedged US index ETF in Canada is the iShares US Fundamental, ticker CLU.C.) I’m surprised and a bit disappointed they didn’t create an unhedged version of the Vanguard MSCI U.S. Broad Market (VUS), which tracks a total-market index with more than 3,200 stocks. But this new ETF will at least allow Canadians to get easy access to large caps without having to trade in US dollars or deal with the persistent drag of currency hedging. The management fee is 0.15%, the same as VUS.

Vanguard S&P 500 Index ETF (CAD-hedged). The demand from advisors for S&P 500 ETFs with currency hedging must be enormous, because this is now the fourth one to appear in Canada if you include the proposed change to the BMO US Equity (ZUE). At least it will be the cheapest: at 0.15% it might even make a dent in the giant iShares S&P 500 (XSP), which charges 0.25% on its asset base of $1.57 billion.

Vanguard has not announced a planned launch date for the ETFs, though I expect it will be in December. (For what it’s worth, Vanguard filed the preliminary prospectuses for its first five ETFs on August 22, 2011, and the funds started trading on December 6.) You can read the preliminary prospectus here.

ETF competition in Canada just got a little more interesting.

58 Responses to Vanguard Announces Five New ETFs

  1. Pancho November 11, 2012 at 6:20 pm #

    I see that Vanguard has set up a DRIP. How will this work with TD?

  2. Canadian Couch Potato November 11, 2012 at 6:51 pm #

    @Pancho: Just call TD Waterhouse and ask them to set up a DRIP on any Vanguard ETFs you may hold. This is actually possible with most Canadian-listed ETFs already:
    http://canadiancouchpotato.com/2011/03/10/a-drip-in-the-bucket/

  3. Jamie May 28, 2013 at 2:59 pm #

    Hi Dan,
    Which ETF would you recommend to provide some US small-cap exposure to a portfolio whose equities are comprised of: VFV, VXUS and ZCN? I’m having a hard time figuring out the difference between VB (Vanguard small-cap) and VBR (Vanguard small-cap value).

    I hear there are plans for a new CAN-listed Vanguard ETF which tracks the entire US market (as opposed to S+P 500) unhedged. However, if one would like to add a slight small-cap bias to one’s equities, I figure it’d be helpful to allocate an additional ~5% to this type of investment.
    Many Thanks,

  4. Canadian Couch Potato May 28, 2013 at 3:28 pm #

    @Jamie: VB tracks small-cap stocks in general, while VBR tracks small-cap stocks considered to be “cheap” according to the traditional value characteristics, such a low price/book and price/earning ratios. So VBR gives you a small-cap tilt and a value tilt.

    Another option would simply be VTI, which tracks the whole US market. Vanguard Canada may soon be offering a version of this ETF with no currency hedging, but there has been no formal announcement.

  5. Jamie May 29, 2013 at 9:29 am #

    Thanks for the response Dan. Would VTI (or the Canadian version) on its own, offer a small-cap or value ‘bias’ ? I recall your book on ETF’s mentioning small-caps with historically greater returns (with a large enough portfolio), I guess my question is, is owning VTI by itself enough or should one consider an additional ~5% of total portfolio in an ETF like VB or VBR to get a ‘bias’ toward small caps?
    For the record I have about 20% of portfolio in each of US, Can and Int’l equities.
    Thanks again, great blog.

  6. Canadian Couch Potato May 29, 2013 at 9:55 am #

    @Jamie: Because large-caps dominate total-market index, a fund like VTI gives you small-cap exposure, but not much. “Tilting” means allocating more to small caps than their market cap would normally merit. So you instead of 20% VTI you might go with 10% large-cap and 10% small-cap.

    I think the small and value premiums are real and may boost returns over the very long term, but I wouldn’t worry about going this route unless you have a very large portfolio and you don’t mind the added maintenance.

  7. Que May 29, 2013 at 5:08 pm #

    @Dan: What would you consider to be a “a very large portfolio”? I sure there are a couple of calculations you could make to show a comparison. Thanks!

  8. Canadian Couch Potato May 29, 2013 at 5:27 pm #

    @Que: It’s all relative, but I’d say if you have less than $200K, it makes little sense to be buying 5% slivers of small-cap or value stocks. Once you’re over $1 million, then it’s almost surely worth it. If you’re in between those two numbers it really depends on how fussy you want to be.

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