In a recent column, Jon Chevreau reported that Vanguard Canada “will probably be selling ETFs trading on the TSX”. It is instructive to take a look at Exchange-Traded Funds Vanguard offers in Australia (thanks to reader Raman for the link) for clues into what to expect here. Vanguard’s Australian ETF line-up is refreshingly simple — one REIT ETF, four stock ETFs and two international ETFs and all charge very low fees.

The REIT ETF that Vanguard offers in Australia charges a management fee of just 0.25%. If Vanguard can introduce a REIT ETF with comparable fees here, it would be a significant improvement over the 0.55% fees that both the iShares S&P/TSX Capped REIT ETF (TSX: XRE) and BMO Equal Weight REITs Index ETF (TSX: ZRE) charge.

One of the stock ETFs that Vanguard offers in Australia is a dividend ETF that also charges a management fee of just 0.25%. A comparable offering at a similar price point in Canada would again be a significant improvement over both the iShares Dow Jones Canada Select Dividend ETF (TSX: XDV) and the Claymore S&P/TSX Canadian Dividend ETF (TSX: CDZ). XDV sports a MER of 0.54% and CDZ is slightly more expensive at 0.66%.

The two international ETFs that Vanguard offers in Australia are local versions of the Vanguard Total Stock Market ETF (VTI) and Vanguard FTSE All-World Ex-US ETF (VEU). The Australian versions charge the same fees as VTI and VEU: 0.07% and 0.22% respectively. A Canadian version of VTI will be a preferable choice in taxable accounts because an investor can avoid currency conversions when purchasing or selling VTI. In a RRSP account, it will still be advantageous to hold VTI because an investor can avoid withholding taxes paid by Canadian domiciled funds but not registered accounts. At a 2% dividend yield, owning VTI directly will save 0.30% in withholding taxes in a registered account.

This article has 7 comments

  1. One thing that confuses me: Canadian domiciled funds and ETFs pay U.S. withholding taxes on the underlying holdings, but Canadian domiciled funds that are based on swaps like HXS do not (apparently). Why don’t more Canadian ETFs holding foreign assets switch over to a swap-based model? This seems popular in Europe.

  2. I’m too lazy to look this up myself, but I wonder how fees for other Australian investment products compare to Canadian fees. Is this a case where Vanguard is trying to get away with higher fees simply because comparable products in Canada are more expensive? A little bit of pseudo price-fixing?

  3. @Viscount: I haven’t looked at HXS in any depth because the ETF tracks the S&P 500 C$ Hedged Index which has a pretty bad tracking error when compared to the total return of the S&P 500 in US$ terms. A swap-based ETF (without currency hedging) will have some significant advantages in both RRSP and taxable accounts but we don’t have one available right now.

    @Sampson: I should look up a recent report that compared MERs in different countries. Vanguard’s Australian ETFs are sometimes more expensive than their US counterparts. However, this may just be a function of the Australian market being much smaller than the US. If Vanguard has similar pricing on any new Canadian ETFs, they will still be significantly cheaper than the competition.

  4. Thanks for the insight, CC. I agree that if there is pricing pressure from Vanguard it will be focused on the Canadian sector and specialty ETFs that currently charge 55 to 65 bps. It’s hard to know whether a TSX-listed version of VTI or VEA would have much impact, as the currency hedging is really what differentiates Canadian funds like XSP and XIN. Most Canadians seem to love their currency hedging.

    @Viscount: HXS would still be subject to withholding taxes, but like anyone else, they can recover it, so they don’t pass on that cost to investors in the ETF.
    http://canadiancouchpotato.com/2011/06/08/swap-based-etfs-what-are-the-risks/

  5. For sure, it would be interesting to know and compare what the Vanguard MERs are, in different companies. Maybe Canada will be closer to Australian fees? Similar economies of scale? Then again, maybe they can get away with even higher fees in Canada since some people are willing to pay any price for mutual funds? :)

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