US Mutual Fund giant Vanguard announced today that it is setting up shop in Canada and will announce its product line-up once it has submitted a preliminary prospectus with regulators. Vanguard’s reference to providing “sound solutions for Canadian advisors and their clients” suggests that its initial focus will be on the advisor channel. As most Canadians invest through the advisor channel where costs can be as high as 2.5 percent, it is a logical place to start. If Vanguard succeeds in driving down costs, it will make a meaningful difference for those Canadians investing through an advisor. DIY investors will have their own ideas of what Vanguard should do: my own wishlist includes a cheap REIT fund and currency unhedged US Total Market and MSCI EAFE index funds.

Oddly for a fund company that pioneered index investing, Vanguard’s website offers up a report that unsuccessfully attempts to make a case for both active management and indexing in a portfolio:

There is a strong argument in favour of combining the two approaches: Adding indexing to active-oriented portfolios can reduce costs significantly and can help temper risk as well. While a blended approach is likely to reduce the performance peaks, it is also likely to reduce the performance valleys, when investors are most at risk of exiting the market in unfavourable conditions. A combined strategy can help avoid the pangs of regret that your clients might otherwise experience when one approach trumps the other.

It’s not clear how one can avoid “the pangs of regret” since very few funds manage to beat the humble index fund in most time periods and it is nearly impossible to pick the winning fund in advance.

Other takes (mostly speculation at this point) on Vanguard coming to Canada:
Jon Chevreau says Vanguard will be introducing ETFs.
Money Smarts Blog on what he expects Vanguard to do.

This article has 22 comments

  1. It sounds like a marketing gimmick similar to combining a fixed and variable mortgage together, even though the variable is likely to save you money 9 times out of 10. Appeals to people who can’t make up their mind either way.

  2. Regarding the “pangs of regret” comment from Vanguard, I think that might be influenced by the large cap US stock indexing experience of the last 10 years. Vanguard used to heavily push the S&P 500 and a bond fund as essentially everything an investor needs, but over the last decade, the S&P 500 actually underperformed 90% of active managers of large cap stock funds in the US (source: http://www.researchaffiliates.com/ideas/pdf/fundamentals/Fundamentals_Mar_2010_The_Folly_of_Peer_Group_Analysis.pdf ). Once you adjust for two types of bias, the advantage of active strategies in the same peer group largely goes away, but explaining that to average investors is pretty difficult, and in the end average, cap-weighted S&P 500 index investors are still left with relatively poor returns for the decade. It’s a bit of a hard sell from a marketing perspective, which is why their US market share is getting a bit beaten up by non-cap-weighted and active rivals. Though in Canada the situation is almost completely different, as the indexes have done well over the same period and the fee drag of active strategies is much more extreme.

  3. The press release was a bit underwhelming. I’m not sure why they couldn’t at least say what general products they are planning (ie ETFs or index funds).

    Oh well – I expect that eventually, they’ll have a full lineup of products similar to what they offer in the US.

  4. Hm, I was about to set up a TDW account tomorrow to start experimenting with eseries index funds. I wonder if I should wait to see what kind of brokerage accounts Vanguard will offer in Canada. I have no experience with investing whatsoever… I guess I might as well start with TDW for now – who knows how long it’ll take V to get from announcement of ‘working through investment advisors’ to making online discount brokerage accounts available.

  5. The quote sounds like it was written by someone who has given up on getting people to embrace 100% indexing. Compared to 100% active stock-picking, the blended strategy would benefit most people. However, compared to 100% indexing, the blended strategy will be worse for most people.

  6. CC- I read into that piece an implicit admission that the Canadian market-place is dominated by bank owned brokerages pushing mutual funds (in a scale the American market-place is not) and it is a much easier sell to have actively managed portfolios begin to move to some passive investing products rather than do the hard and long sale of converting actively managed portfolios to passive managed ones lock, stock and barrel-not to mention trying to ease the minds of the gatekeepers, the IA’s, who may view Vanguard’s entry in a much less positive light than the blogging community. Perhaps the piece is, indeed, wishy-washy but it appears to reflect an understanding of the harsh realities of the Canadian market-place.

  7. In my opinion, the idea that Vanguard will create an ETF price war is overblown. As long as you can get past the outrageous currency conversion fees charged by brokerages, Canadians can already assemble an ETF portfolio for 20 or 30 basis points. Bringing that down isn’t going to make a huge difference.

    I feel Vanguard could change the game in Canada by offering a family of index mutual funds (not ETFs) that individuals could buy directly from Vanguard. Think of what ING and Ally have done for GICs and extend that to a complete investment platform for DIY investors. Right now Canadian investors have very few opportunities like this — the TD e-Series funds are probably the best, but the offerings are very limited, and we all know how access can be difficult.

    One thing Vanguard would likely need to do (and I would support it) is to impose a significant redemption fee on mutual fund investments shorter than six months or so. They do this already in the US to discourage traders, whose activity is detrimental to all unitholders in the fund.

  8. @Viscount: Good point. There is a lesson here for us Canadians too. There is a lot to be said for building globally diversified portfolios. It didn’t help us much over the past decade but surely US investors will wish they had put some of their portfolios in international markets.

    @Mike: I guess we’ll know pretty soon. Jon Chevreau writes that filings will be made this summer.

    http://business.financialpost.com/2011/06/06/vanguard-confirms-canadian-launch/

    @Jay: I think you should slow down and put together an investment plan first. Picking a brokerage is not all that important. If you are unhappy you can always fairly easily transfer your accounts. The products you choose should fit your investment plan, so that will be the first thing to work on (either on your own or through an advisor).

    @Michael @Thicken My Wallet: I think you guys are right. Vanguard seems to be focusing its marketing on getting advisors to add index products rather than getting index investors to add active management.

    @Canadian Couch Potato: Yes, a low cost, direct to investors channel would be welcome but would it make a significant difference? ING offers Streetwise funds which costs significantly less than typical advisor-sold funds but the funds have gathered about $500 million over 3 years. That’s not bad but not game altering. It is not a bad idea to start with the advisor channel but I’d be curious to see what Vanguard’s strategy is considering the lock mutual fund companies and banks have on this channel.

  9. Vanguard opened a similar branch in Australia last year. If it is any indication of what they are planning for Canada, we can expect both a large set of ETFs priced in CAD (see http://www.vanguard.com.au/personal_investors/knowledge-centre/etf/basics/en/overview-of-vanguard-etfs.cfm for what they have in Australia priced in AUD), and a large set of mutual funds as well.

    I, for one, can’t wait for them to start listing on the TSX :)

    • @Raman: Thanks very much for the link. If the Australian ETFs provide a template for what Vanguard is planning for Canada, it is good news indeed. I would love to see a REIT ETF and VTI in Canadian dollars.

      @Steve: I don’t know about subsidizing US investors. If you look at Raman’s link to Australian ETFs they all look fairly cheap to me.

  10. Methinks they want to subsidize their US shareholder-investors by milking Canadians (and Australian) investors. The spreads b/w mutual funds and ETFs are just too wide and you can get USD at par with the profits. Still, I applaud more competition.

    As a DIY investors, I only get “pangs” of ectasy when I see how poorly almost all mutual funds do compared to my ETF portfolio.

  11. @CC: Wouldn’t a Canadian-domiciled VTI be subject to US withholding taxes even if held in an RRSP? It seems to me that would be a fairly significant disadvantage.

  12. @Rysto: Yes, it would. A Canadian domiciled VTI, VEA or VWO is therefore not ideal for a RRSP account. Assuming a 2% dividend yield, the penalty is a rather significant 0.3% p.a. Canadian domiciled funds will only be suitable for taxable holdings.

  13. Geez – and I thought BMO was late to the ETF game. The ETF market is so crowded that it is difficult to imagine what they would do that some other company hasn’t already done, except maybe offering slightly lower fees. I think one of the talking heads on BNN counted up over 200 ETFs on the TMX?

    I’m normally a stock picker and generally avoid ETFs, but I do occasionally dip into an ETF for liquidity & volume reasons. As a result, in my line of thinking, I believe that is where new entrants to the ETF market may lay… For example, stock pickers like me balk at the bid / ask spreads (sometimes 10% of the value of the security) and low volumes (some trading days, 0 shares change hands) of some perfectly good securities, such as the preferred shares of banks & insurance companies – as a perfect example. An ETF may be able to cut one of those “bought deals” that we read about and get a large block of preferred shares from a handful of banks and insurance companies and then they can offer us stock pickers better liquidity for getting into and out of those securities.

    That would be my advice to anybody out there listening who may be looking to set up new ETFs… Is anybody listening?

  14. Oops, bad example, as HPR from Horizons offers an ETF for that, which has about a $ 0.15 bid / ask spread, which isn’t too bad, I guess, at a 1.5% difference at today’s trading price. But the idea is still valid – meaning just to focus on securities which are difficult for us stock-pickers to trade.

  15. @CC: I wouldn’t put the ING Streetwise Funds in the same league with Vanguard. Although I have recommended these funds for very small investors (say $20K or less) as a way of getting started, a 1% fee (plus HST) for an index fund is simply way too much. What Vanguard could potentially offer would be far, far greater choice and fees about 75% lower.

  16. Interesting to look at the Vanguard Australia site. Access to VTS and VEU on the TSX would be a big plus (Vanguard is trading it on the ASX)– US stock exposure at .07% MER and international exposure for .22% without any need to exchange dollars. Good luck to iShares Canada trying to compete with that! Looking at the “local” Australia ETFs, Vanguard looks like its shares are significantly cheaper than the iShares Australia ETFs (25 basis points on the small cap ETF).

    Shortcomings: there don’t appear to be any “local” bond ETFs set up yet by Vanguard Australia. Vanguard offers some good bond ETFs in the US. Hopefully they will launch a few good Canadian bond ETFs here.

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  20. I am a fee based planner and have limited choices for index/ETF type products (MFDA only). I am glad to see they will be going through the advisor channel and hope they add some low cost options that I don’t already have.

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