Vanguard Canada appears to have been listening to ETF investors. The fund company known for its low-cost, plain vanilla index products will shortly be adding five new ETFs to its existing line up of six ETFs. The new ETFs are:

Vanguard FTSE Canadian High Dividend Yield Index ETF (TSX: VDY)

The ETF will track an index of Canadian stocks that sport a high dividend yield. There is very little information on the index available currently other than it is market cap weighted and focused on dividend income. The management fee is 0.30%. It is worth noting here that the new dividend ETF will be 0.20% to 0.30% cheaper than popular Canadian dividend ETFs such as the iShares Dow Jones Canada Select Dividend Index Fund (XDV) and the iShares S&P/TSX Canadian Dividend Aristocrats Index Fund (CDZ).

Vanguard FTSE Canadian Capped REIT Index ETF (TSX: VRE)

This ETF will track the FTSE Canada All Cap Real Estate Capped 25% Index. The index is composed of publicly-traded companies in the Canadian real estate sector with each constituent’s weight capped at 25%. The management fee is 0.35%, which is 0.20% cheaper than the popular iShares S&P/TSX Capped REIT Index ETF (XRE).

An interesting question is whether the new Vanguard REIT ETF is still worth unbundling to save on MERs. Let’s assume that an investor wants to hold five REITs in equal weights directly and rebalance once every year for the real estate portion of the portfolio. If the investor pays $10 per trade, the break-even point will be just $14,300.

Vanguard S&P 500 ETFs

The Vanguard S&P 500 Index ETF (ticker symbol VFV) finally provides Canadian investors access to a low-cost, US market ETF that does not hedge currency exposure. This ETF will provide investors with two advantages: (1) Eliminate the need to exchange Canadian dollars even if it is through low-cost currency conversion alternatives like the Norbert Gambit and (2) Provide Canadians with a way to avoid headaches with US Estate Taxes entirely. However, the Vanguard S&P 500 Index ETF will incur a drag of about 0.30% in RRSP and RRIF accounts compared to directly holding an US-listed ETF (See post on how withholding taxes affect the choice of international investments for an explanation).

The Vanguard S&P 500 Index ETF (CAD-Hedged) (TSX: VSP) is the currency-hedged version of the Vanguard S&P 500 Index ETF. Both ETFs will charge a management fee of 0.15% and both ETFs will simply hold the US-listed Vanguard S&P 500 ETF (VOO). VOO has an expense ratio of 0.05% but the Canadian-listed S&P 500 ETF management fees indicated are inclusive of VOO’s expenses.

Vanguard Canadian Short-Term Corporate Bond Index ETF (TSX: VSC)

This fund will track the Barclays Global Aggregate Canadian Credit 1-5 year Float Adjusted Bond Index, which is composed of investment grade corporate bonds with maturities ranging from one to five years. The management fee is 0.15%.

Note that the ETF MERs are likely to be slightly higher because certain operating expenses such as brokerage commissions and harmonized sales taxes will be charged to the fund in addition to the management fee. You can read the ETF prospectus here.

You can read Canadian Couch Potato’s take on the new ETFs here and a discussion on this topic on the Canadian Money Forum here.

Updated Nov. 8, 2012 with ticker symbols. Details here.

This article has 10 comments

  1. I know you did the comparison with XRE, but in regards to the Vanguard S&P 500 Index ETF (MER .15%) compared to XSP (MER .25%). How much would the .30 drag mentioned in RRSP accounts compare to holding XSP in an RRSP?

  2. @Cal: The drag for XSP will be exactly the same as the Vanguard Canadian-listed S&P 500 ETF. That is because XSP simply holds the iShares S&P 500 ETF (IVV).

    The way it works for XSP is as follows: IVV flows through its dividends to XSP. XSP pays withholding tax @15%. Since, IVV has an yield of 2%, the drag will be 30 basis points (15% of 2%). Inside a RRSP account, the withholding tax is not recoverable. In a taxable account, an investor can get a foreign tax credit to offset the withholding tax.

  3. Hi CC, I wonder if you can answer my question on TD e-series and withholding taxes. Would I be able to reclaim foreign tax credit if I hold TDB902 (US fund) or TDB911 (int’l fund) in a taxable account versus a registered account?


    • @Peter: Sorry for the delay in my response. The answer is yes. In a taxable account, both TDB902 and TDB911 will issue you with a T5 slip. Box 15 (Foreign Income) will include the total dividends paid to you. Box 16 will indicate the foreign tax paid. Plug it both into your favourite tax software and it will calculate and apply the foreign tax credit for you. The process is exactly the same as if you had held an equivalent US-listed ETF directly. Hope this helps.

  4. So which one will be better to hold in an RRSP account? Vanguards S&P 500 ETF or TD e-series US index fund? Does the withholding tax also apply to the TD US index fund?

  5. CC,

    Inside a TFSA are there benefits to owning the Vanguard (CDN) S&P 500 Non Hedged compared to XSP?

    • @CK: Can you clarify your question? Are you asking if there are any differences tax-wise between Vanguard CDN S&P 500 and XSP? Or is it from the point of an investment?

      Tax-wise the two ETFs are the same inside the TFSA. XSP and Vanguard CDN S&P 500 will both incur a 15% withholding tax hit. As a matter of fact, so will a direct holding in an US-listed ETF such as VTI. That’s because the withholding tax exemption available in RRSP accounts does not extend to TFSA accounts.

      Investment-wise, I would argue that Vanguard CDN S&P 500 has advantages. It is cheaper and since it is unhedged, an investor would not incur the performance hit that currency-hedged funds do.

  6. What are your thoughts on VTI vs the new CDN denominated S&P500 ETF? Given that US equity is a significant chunk of my asset allocation, I do think having a lower MER matters.

  7. It would be great to see a follow up article on these funds in 3-6months to see how they have gained market share in comparison to some of the ishares etfs.