You knew it was coming: Vanguard Canada has dramatically reduced the fees on 11 of its ETFs. The announcement came this week, and it affects some of the most popular funds in the Vanguard lineup:
| ETF | Ticker | Old fee |
New fee |
| Vanguard FTSE Canada | VCE | 0.09% | 0.05% |
| Vanguard FTSE Canada All Cap | VCN | 0.12% | 0.05% |
| Vanguard FTSE Canadian High Dividend Yield | VDY | 0.30% | 0.20% |
| Vanguard S&P 500 | VFV | 0.15% | 0.08% |
| Vanguard S&P 500 (CAD-hedged) | VSP | 0.15% | 0.08% |
| Vanguard FTSE Developed ex North America | VDU | 0.28% | 0.20% |
| Vanguard FTSE Developed ex North America (CAD-hedged) | VEF | 0.28% | 0.20% |
| Vanguard FTSE Emerging Markets | VEE | 0.33% | 0.23% |
| Vanguard Canadian Aggregate Bond | VAB | 0.20% | 0.12% |
| Vanguard Canadian Short-Term Bond | VSB | 0.15% | 0.10% |
| Vanguard Canadian Short-Term Corporate Bond | VSC | 0.15% | 0.10% |
Normally the leader when it comes to low costs, Vanguard actually got scooped by its competitors in Canada this year. iShares slashed fees on several ETFs back in March, and BMO followed up a month later with dramatic cost cuts of its own. In a blog post last spring comparing the core equity ETFs of the three providers I wrote: “Surprisingly, the Vanguard counterparts are now the most expensive in the group. I’m pretty sure no one saw that coming, and I would be surprised if it stayed this way for long.” Well, it took less than six months.
The lower fees suggest Vanguard is now feeling comfortably positioned in the Canadian marketplace. The company is approaching its third anniversary in Canada and its growth has been particularly strong this year. During the 12 months ending September 30, Vanguard’s assets under management grew by 122% and the firm is approaching the $3 billion mark. By comparison, BMO ETFs got to $3 billion a little faster (just under two-and-a-half years), but it had a better-known brand, an army of affiliated advisors, and a lot less competition.
Bonding over low fees
In my view, the most significant fee cut is to the Vanguard bond funds. When iShares launched its Core family of low-fee ETFs they conspicuously left out the $1.6-billion iShares Canadian Universe Bond (XBB) and the even larger iShares Canadian Short Term Bond (XSB): these funds still have bloated MERs of 0.33% and 0.27%. (Instead they rebranded two smaller funds and gave them management fees of 0.12%.) BMO’s fee reductions did not include its flagship bond ETFs either. But Vanguard reduced the cost of its biggest fixed income funds: the Vanguard Canadian Aggregate Bond (VAB) and the Vanguard Canadian Short-Term Bond (VSB), which are now the cheapest (or tied for the cheapest) in their categories at 0.12% and 0.10%, respectively.
Vanguard has also become the cost leader among S&P 500 trackers, undercutting its competitors’ XUS and ZSP by a couple of basis points. Sure, it would have been nice to see the Vanguard U.S. Total Market (VUN) on the list, but this ETF—which holds more than 3,700 stocks—does not have any direct counterparts at iShares or BMO. Even at 0.17%, it’s still my choice for US equities because of the addition of all those mid- and small-cap stocks.
As Justin Bender pointed out in his latest blog, RRSP investors should still pay attention to the structure of foreign equity ETFs: the Vanguard international equity funds still face an additional layer of foreign withholding taxes because they use an underlying US-listed ETF rather than holding the stocks directly. (For more information, see our white paper.) But it’s now possible to build a globally diversified portfolio with a management fee of less than 0.15% at all three of the major ETF providers—about half what you’d have paid just four or five years ago. Looks like the “Vanguard effect” has finally arrived in Canada.
Disclosure: I hold VAB in my portfolio.
Hi Dan! Don’t worry, I’m not going to ask when you’re updating the model portfolios ;)
You and Justin have been on top of the withholding tax issue lately, but I’m wondering: is there any literature on the tracking error and/or bid-ask spreads for the various ETF structures used (i.e., holding directly vs holding a US-listed)? So far as I can tell, that’s the reason Vanguard is giving for continuing to stick with what you’ve call the ‘Type E’ structure, and I’m wondering if their point has merit. Or is it one of those “time will tell” situations?
@Neil: Thanks for not asking about the model portfolios. Actually, this fee drop is making me look good for not switching out of VCN and VAB as soon as the other providers lowered their fees. ;)
It’s pretty hard to track bid-ask spreads, because they seem to vary from day to day. And I don’t think we really have a long enough time period to measure the tracking error. All of the decent international equity ETFs (such as VDU, ZDM, XEF) are quite new and they have undergone index changes or fee changes as well. So it will definitely take some time to measure accurately.
Vanguard’s argument about fewer transactions and better liquidity with the wrap structure has merit, but I don’t think it’s enough to make up for the very significant tax drag in an RRSP/TFSA..
I’m happy to have the “Vanguard Effect” come to Canada. My understanding of Vanguard’s structure in the U.S. is that their employees get bonuses tied to how low their MERs are. Do you know if they do the same thing in Canada?
@Michael: I don’t know, but I will definitely ask my contacts at Vanguard next time I speak to them. Technically that bonus structure is linked to assets under management (which drives the MER changes) but that’s still a cool way of looking at it. :)
I read somewhere that Vanguard employee bonuses in the U.S. are a percentage of the savings Vanguard investors experience compared to the typical U.S. mutual fund. If this is true, then bonuses are a function of both AUM and the average MER. The Vanguard Canada site touts the company’s U.S. structure as a big advantage (https://www.vanguardcanada.ca/advisors/about-vanguard/about-vanguard.htm). This may well be true, but I found it strange that they say nothing about the structure in Canada. They say that the U.S. structure allows Vanguard Canada to leverage “the scale, experience and resources of our established global business.” But they don’t say why they have an incentive to keep costs low for Canadian investors.
Can you please edit your “model portfolios” to reflect the changing MER’s.
Also, would this lower the threshold to purchase a self directed at Questrade vs Buying a Tangerine low cost mutual fund?
I hope so.. I don’t want to switch back!
Thanks for fighting the good fight guys.
@ Michael James:
“I found it strange that they say nothing about the structure in Canada. They say that the U.S. structure allows Vanguard Canada to leverage “the scale, experience and resources of our established global business.” But they don’t say why they have an incentive to keep costs low for Canadian investors.”
They don’t say “why” simply because Vanguard Canada does not have any particular non-commercial incentive to keep costs low for Canadian investors.
I’ve mentioned this before here: as a wholly-owned subsidiary of The Vanguard Group in the US, Vanguard Canada’s incentive is to maximizes returns to its shareholder, exactly like BMO and iShares. If lowering fees helps it to accomplish that goal, all the better for us, but our interests as investors are only incidental to increasing AUM.
I think Canadian investors tend to be blinded by the “Vanguard Effect” as it applies in the context of the mutualized ownership (by the funds) structure in the US – and so automatically assume similar structure and incentives here, or least a similar cost-cutting culture. Vanguard Canada is of course very careful to keep those waters well-muddied, as you noted.
It’s great that Vanguard is helping to drive down costs for Canadian investors, no matter why they are doing so. But the fact remains that those lower fees in Canada will only last as long as they are in the commercial interest of Vanguard Canada’s owner, The Vanguard Group in the US, NOT as long as they benefit Canadian investors.
@Steve: Thanks for the information. If Dan gets a chance to ask someone at Vanguard Canada about this, I’ll be interested in their response.
Any word if iShares will finally lower their MERs on XBB and/or XCB?
iShares will likely never lower their MER too much on funds such as XIU, XBB, XCB because they have such high AUM. Many investors are locked in to those funds because of unrealized capital gains and iShares knows it. That’s why you see twin funds being created by iShares (XQB, XLB, XIC, etc, etc) in the “Core Series” that have a lower MER.
@ Andrew:
XIC is one of the oldest iShares ETFs (created in 2001) and at the time of the MER reduction was one of the biggest with AUM of +$1.5 billion.
That doesn’t necessarily negate the rest of your comment however.
@Andrew, you’re spot on. Switching costs are not trivial – and may include crystallized capital gains tax, trading commissions, resistance to change (past returns) and simply time/effort (passive strategy). This seems classic market segmentation by iShares – competitively low-fee priced new funds intended to attract new AUM, coupled with “higher” fee funds intended to generate revenues. iShares has bills to pay too! XBB alone generates about $5m annual revenues (~$1.6bn AUM @ 0.30% mgmt fee).
@CCP, gotta tip the hat. Earlier this year, a few people asked you about switching ETFs after BMO and iShares slashed their fees (https://canadiancouchpotato.com/2014/04/22/how-low-can-etf-fees-go/). Your advice, and apologies for simplifying, was ‘chill’. On the basis of a) a few bp here-and-there are incremental in their $ impact, b) a switch may have a significant payback period, due to switching costs, and c) Vanguard, as a low-cost producer, seemed credibly likely to resent a high-cost competitive positioning. Great advice :)
It would be interesting to understand the impact on market share changes between BMO, iShares and Vanguard between March (iShares) and April (BMO) and now. To what extent did the reduced pricing in March/April hurt Vanguard?
@ Michael James:
“If Dan gets a chance to ask someone at Vanguard Canada about this, I’ll be interested in their response.”
The question that should be asked of Vanguard Canada management is:
Given that Vanguard Canada is a wholly-owned subsidiary of The Vanguard Group in the US;
Given that management of The Vanguard Group has to justify its investment in Vanguard Canada to its US unitholder-owners;
Given that it is therefore reasonable to conclude that Vanguard Canada has an interest in maximizing value for its US parent company;
What actual incentives if any exist to differentiate Vanguard Canada’s approach to fund costs from that of iShares Canada or BMO?
Notwithstanding corporate spin about leveraging the unique ownership structure of The Vanguard Group in the US and a culture of lower costs and a “Vanguard Effect” etc and so on – I’ve never seen a straight answer to that question.
Instead Vanguard Canada seems to go out of its way to produce bafflegab intended to obscure the fact that its ownership structure and corresponding interests are basically similar to iShares Canada and BMO.
Hi Dan
This is a 2 part question
In this potential environment of rising interest rates in the near future
Would an actively managed bond mutual fund be preferred over a bond etf?
With these new reduced Vanguard Mer’s , would vanguard be the preferred choice for a new bond etf investor. If one were to put money into a bond etf (rsp account) 4 times a year would this still be a better strategy cost wise (taking into consideration trade commission, bid-ask spread) than an actively managed bond fund with most Mer’s over 1% .
I would appreciate your insights on this.
Thanks, Sue
Like 5inatrailer, I’m interested in the comparison between online brokerage vs Tangerine for accounts with less money with these recent changes.
But even then, I still think the only reason why Tangerine is better is because of the rebalacing. Other than that, it has a higher MER (compared to ETFs) and some online brokerages have free ETF and MF trading anyways.
@Steve: I’m not sure I understand the criticism of Vanguard Canada, especially given all of the genuine villains in the financial industry. No one here has suggested they’re a humanitarian aid agency or even a non-profit organization. They’re a business just like BlackRock and BMO. But they do have a track record of driving down costs in every market where they have set up shop, even outside the US (the UK, Australia, and now Canada). iShares had the ETF market to itself for about a decade (except for a short-lived experiment by TD) and never had any need to lower its fees. When BMO arrived in 2009 they set heir fees at a similar level. It was only after Vanguard arrived that the ETF price wars heated up. That’s not a coincidence.
I don’t think there’s any “bafflegab” in their marketing material. Certainly the Canadian operation benefits from the “the scale, experience and resources of our established global business.” I’m trying to imagine an independent firm in Canada creating a product like VUN for 0.17%, for example. By being able to use Vanguard’s enormous US funds as underlying holdings they can give Canadians access to total-market indexes that would be impractical to replicate here. Even BMO has used representative sampling with its newer funds because they don’t have that advantage.
@Ross: Thanks for the comment. I didn’t have any foreknowledge of Vanguard’s price reduction, but I do see a danger in rebuilding your portfolio every time a new product appears or a fee is reduced. Reviewing the portfolio once a year or so is plenty.
@Sue: An actively managed bond fund would be preferable to a bond index fund if active managers could predict changes in interest rates. There is no evidence they can do this, and therefore it makes no sense to pay them an additional fee to attempt it. If you agree with that reasoning it answers both of your questions. :)
@CharlieF and 5inatrailer: I have now updated the weighted MERs on the Model Portfolios page. The cost of the Global Couch Potato has dropped to 0.14%. I don’t think this affects the ETF vs. Tangerine decision at all. The ETF option has always been cheaper, and it always will be. The benefit of the Tangerine funds (or another index mutual fund option) is the convenience and enforced discipline. Readers of this blog often assume that anyone can build and maintain an ETF portfolio at a discount brokerage, but unfortunately this is not the case.
@CharlieF. another advantage of a Tangerine, all in one fund, is psychological. You don’t see returns of the individual components. I am seeing many comments of new investors who went the TD-Series way, and now panic because the “insert worse asset class” is down 5%, and looking to move out of that class.
Hi,
I was wondering if it would make sense to sell my VEA and VWO holdings to buy more VTI within my RRSP, then sell my VUN holdings in my TFSA to buy more VEE and VDU? This would result in lower MERs, so is this a good idea?
I’m with Questrade so I would only have to pay commissions to sell, not to buy.
Thank you!
@CCP:
Do you think it is reasonable to expect Vanguard Canada to eventually offer index mutual funds, like they do in Australia for example, or is it very unlikely?
https://www.vanguardinvestments.com.au/retail/ret/investments/managed-funds-retail.jsp#fundstab
With the VFV MER getting cut in half, is VUN really the better ETF at this point? It has double the MER of VFV, although it’s a bit more tax efficient. This is assuming both ETFs are in a non-registered account.
I’m about to invest 100k+ into one of these funds, so any advice would be appreciated.
Thanks!
@Rick: In terms of MER and asset location that makes sense, thought VEA and VWO will still be cheaper and more tax efficient than VEE and VDU. Hard to know what the overall effect would be without knowing the size of the holdings.
@Jas: I really have no idea whether Vanguard will eventually launch index funds in Canada. I hope they do, but the fact is that direct-sold mutual funds have not been particularly popular in Canada. I have asked them about this before and the answer is always “we have no plans to do so at this time, but never say never.”
@Ezra: In my view, the additional exposure to midcap and small cap stocks is likely to add more than 8 basis points over the large-cap S&P 500 over the long term. For what it’s worth, over the last 10 years (ending September 30) it has added about 50 bps annually.
@Michael James and Steve: I asked Vanguard to provide comment about its corporate structure in Canada. David Hoffman of Vanguard Public Relations responded as follows:
@Dan: I was hoping to hear that Vanguard Canada employees had some part of their compensation tied to keeping fees low. It appears we’re being asked to trust that it is in Vanguard’s nature to keep costs low. The evidence so far seems to be that this is true everywhere they operate in the world. However, it seems that only in the U.S. do Vanguard employees have a direct economic incentive to keep costs low. Unless I’m missing something, the Vanguard U.S. incentive would be to shift costs out of the U.S. to foreign parts of Vanguard to boost bonuses in the U.S. Even if this is true, it’s no worse than BMO or iShares.
All that said, I and my extended family are long 7 figures of VCN. Go Vanguard!
I’m surprised that there is so much discussion on the corporate structure of Vanguard Canada. The worst case scenario is that they are a for-profit corporation like Blackrock or BMO. I own iShares, BMO and Vanguard ETFs in my portfolio, but I do have a preference for Vanguard ETFs for one simple reason. It appears to me that they have very low, if not the lowest fees, in most asset classes and they will not be undercut. That’s all I need to know.
@CCP & Michael James:
“It appears we’re being asked to trust that it is in Vanguard’s nature to keep costs low.”
Yep, only US fund unitholders see their interests aligned with The Vanguard Group, due to the mutual ownership structure. That is not the case here in Canada.
The real issue, of course, is not that Vanguard Canada is in fact no different than iShares or BMO. No problem there at all, and the more competition the better.
The issue – putting this as diplomatically as possible – is a disconnect. There are very real benefits for US fund investors in being indirect legal owners of The Vanguard Group. But the reality of Vanguard Canada is quite different, in that investors here are not owners, so they have to rely on a corporate “culture” that can change at any time, particularly if that change suits the interests of the ultimate US owners. That difference is not clearly set out in Vanguard Canada materials, in my opinion – and if the disconnect between image and reality leads to false assumptions by Canadian investors, there is a problem. The difference in investor positions between the US and Canada needs to be clarified.
To take an example:
If Vanguard Canada could lower management fees on many ETFs last week, then almost certainly it was within their capacity to ALREADY have lower fees 6 months ago. Instead, the appearance is – and I grant we can’t know the full facts – they chose not to lower fees as much as possible, until forced into the move by competitive pressure from iShares and BMO.
There is nothing inherently wrong with that at all – iShares and BMO act the same way and that is fine. And there is no inherent reason why Vanguard Canada should not try to maximize management fee income, consistent with increasing AUM. That is the point of being a for-profit enterprise.
But it should warn Canadian investors there is no guarantee that Vanguard Canada will always and necessarily be the lowest cost ETF provider – and more fundamentally, it shows that the interests of Vanguard Canada are most certainly NOT aligned with those of its investors, as is the case with The Vanguard Group in the US.
I wouldn’t short Vanguard Canada, but neither am I expecting a second coming here of the messiah that was John Bogle and The Vanguard Group in the US!
Thank you CCP for putting the questions to Vanguard Canada, and posting the answers.
@Smithson:
“It appears to me that [Vanguard Canada] have very low, if not the lowest fees, in most asset classes and they will not be undercut.”
They were undercut for 6 months – and there is no guarantee at all that they will not let themselves be undercut in future, if it suits their interests.
Image is not reality. That’s the point of discussing the ownership structure. You pays yer money …
@Steve: Allow me to re-phase: “It appears to me that they will not be undercut for a significant period of time.” In an investing lifetime, I don’t think 6 months is worth getting worked up about.
Of course, image is not reality, but I do not purchase Vanguard ETFs based on their image. That would be foolish. I purchase their ETFs based on cost, tax efficiency, portfolio fit, etc. If that changes then so will my view on this matter.
@ Smithson:
Agree, just one comment:
>> “If that changes then so will my view on this matter.”
Whether one can act on that changed view is the issue.
Leaving aside transaction costs, large unrealized taxable capital gains can effectively lock investors into fund choices that no longer make sence, or make switching very expensive. This issue applies to taxable investments from all providers, of course – and is why it is important for investors to have as much relevant information as possible when choosing fund company(ies)/ funds in the first place.
Holding one’s portfolio in registered accounts with access to very low-cost trading does make the choice of fund company(ies)/ funds that much easier, however!
@Steve: Agree 100% with your last comment. In fact, what you describe is happening to me right now. I started making regular quarterly purchases of XIU in 2003 in my non-registered account. It is currently the largest position in my portfolio. I was surprised when Blackrock recently reduced the MER on XIC and other iShares funds, but not on XIU. I can’t switch from XIU to VCE or VCN since it would trigger a large capital gain. Suffice to say, I am not happy with Blackrock right now. Hopefully, they will change their mind in the future and reduce the MER on XIU to be more competitive. I’m going to give them 6 months… ;-)
Do you know if they have any plan to lower fee on VXC ? With VDU and VEE lowering fees, VXC is becoming less interesting.
@Smithson: It’s hard to imagine that BlackRock will reduce the fee on XIU. That ETF has a unique role in Canada: it’s really more of an an institutional tool and trading vehicle than a buy-and-hold retail product. In any case, with $11 billion in assets, every basis point in fees works out to $1.1 million in revenue.
@Louis: Fund providers will never tip their hand about what fee reductions to expect in the future. VXC is unlikely to ever be the cheapest option, but it’s an excellent choice for those who are willing to pay a few extra basis points for the convenience of managing one fund instead of three.
@Dan
You mention that the addition of medium and small cap stocks in VUN adds more than 8 basis points over the large cap S&P 500 VFV over the long term. Could you also address the difference in volatility (risk) one can expect in VUN vs VFV? Should VUN be more volatile because of these smaller cap stocks, or is there perhaps negative correlation at play making VUN no more, or even less, volatile than VFV?
TIA
@Smithson:
Sadly, I know that feeling all too well, and something tells me 6 months might be the least of it, for the reasons CCP gave … On the upside, feel free to join my “Bears are beautiful too” booster club!
You know all this, but I’ll put it out there for others: a less-discussed advantage of Vanguard Canada’s funds is that most of them track different, but functionally similar, indices to those of other providers – so when that market crash comes, no superficial losses when transferring (depreciated) portfolio assets to them.
@Jim R: I should stress there is absolutely no guarantee that VUN/VTI will outperform the S&P 500. There is is only the expectation based on the small-cap premium that has existed in the past. I would expect the correlation to be in the order of 0.95 or more. You can run an analysis at http://www.portfoliovisualizer.com/asset-correlations.
Hi Dan,
Would buying VSB, VSC and TDB909, is there any overlap in terms of what they hold?
@Jeff: There is definitely a lot of overlap. That’s not harmful, it’s just inefficient. That said, it can make sense to combine a broad based bond fund like TDB909 with a short-term fund like VSB. The former has a duration of about seven years, while the latter is about three years. So holding equal amounts of each would effectively give your bond holding a duration of about five years. Think of it like adding hot and cold water to the bath until you find the temperature that feels right.
@Dan: I hold – VSB (Bonds), VUN (US Total Stock market) and VDU (International Ex. N.A.) all from Vanguard.
Do you think I need exposure in another area – i.e., emerging markets, real estate, etc.?
Or should I just continue investing in these three? My portfolio is just $100,000 and I’m following the 40% bonds with roughly 30% in VUN and VDU.
Just wondering if you feel I’m missing something in my portfolio. I don’t have CAD market because I’m an expat.
Thanks.
@Joe: I don’t think you should feel the need to make your portfolio more complicated by adding asset classes. Despite holding just three funds you’re more broadly diversified than most investors will ever be.
@Dan: Thanks for the reply, Dan. Well, I’ll just keep plugging away with what I have, then.
To be clear, are the “fees” listed for Vanguard in this article representative of “management fees” or “management expense ratios”? I ask because when I go directly to the Vanguard Canada website, the MERs are considerably higher.
For example, the management fee for VCN is 0.05% as indicated above, but the MER is 0.11%.
Likewise, the management fee for VFV is 0.08% as outlined above, but the MER is 0.13%.
And the management fee for VAB is 0.12% as indicated above, but the MER is 0.19%.
Have I understood correctly?
@Victor: The table in the blog post lists the management fees. The full MER is usually about 10% higher to account for taxes and incidental expenses: for example, if the management fee is 0.12% I would expect the MER to be about 0.13% going forward.
This situation is a little unusual. The MERs are based on the previous 12 months, and Vanguard lowered its fees partway through that 12-month period. So the higher-than-expected MERs reflect the older, higher fees. Going forward I would expect these to come down several basis points.
Excellent. Thank you very much!
It appears that participants in this thread are obsessed with MER’s as no mention of Vanguard performance has been raised. How does CCP rate the various Vanguard funds?
I own TD Dividend Growth funds that I contribute to on a molnthy basis. I don’t have enough money in it (under $3k) to switch to an ETF, but the TD Canadian Index e-Series has a very attractive MER of .31% (vs 1.92% for Dividend Growth). My plan is to accumulate mutual funds first then switch to ETFs eventually.Given my position am I better off switching to TD Canadian Index e-Series? I’m only in my 2nd year of investing.
@Akinyemi: In general I recommend index funds over actively management funds, especially when the difference in fees is over 1.3%.
Hi Dan! First of all, I want to say thank you for this site and helping people like me discover the smarter way to invest. I stumbled upon your site a while back and it has certainly led me on a path of learning, research, and helped me see my personal finance in a whole new way.
I have a question for you – would you recommend setting up a US-dollar-based TFSA and buying Vanguard US funds (specifically, VTI) which seem to have a lower expense ratio?
Or should I just go the standard route and buy the Vanguard Canada equivalent (VUN), which seems to have higher fees and expenses, but in a CAD-based TFSA which wouldn’t have any currency-exchange issues involved?
Thanks a lot!
@Christian: Thanks for the comment. In general I don’t recommend using US-listed ETFs in TFSAs. The difference in MER is often only about 0.10%, which is $10 on every $10,000 invested. In most cases the cost of converting the currency will exceed that small benefit:
https://canadiancouchpotato.com/2013/12/09/ask-the-spud-when-should-i-use-us-listed-etfs/
Thanks a lot, Dan!