Vanguard Canada has commenced publication of a quarterly newsletter it’s making available to Canada’s financial advisors. The first edition of Vanguard Insights features a short video of managing director Atul Tiwari plus a link to a long analysis of indexing in Canada originally published last summer.
In the video, Tiwari describes the changing financial landscape in Canada, with advisors “moving towards a fee-based business model” even as their customers (investors) become more sensitive to the impact of fees on long-term net returns.
Vanguard has already seen this movie before in the U.S., U.K. and Australia.
As I noted in a recent column, Vanguard is quite a bit different than the rest of the pack. In his Capital Ideas client letter, BC based fee-only financial planner Fred Kirby lays out the case for Vanguard, all other things being equal. As Tiwari says in the video, it all flows from parent company The Vanguard Group, Inc. of Valley Forge. Vanguard is ultimately owned by the shareholders of Vanguard’s US mutual funds and ETFs, a unique ownership structure Tiwari says “helps us to align our interests with those of our investors globally.”
The language may seem similar to what other fund companies pronounce but in the case of Vanguard I believe it to be true. As Kirby notes, Vanguard generally proves to be the lowest-cost provider in any market it serves. “Costs matter, so when given a choice between equivalent investment products offered by major ETF providers, the choice should always favour the lower cost product and Vanguard usually wins hands down.”
In my initial column on the pending acquisition of Claymore Investments by BlackRock Canada (maker of the dominant iShares), I suggested Canada’s two dominant ETF providers had gotten together primarily to fend off the incursions from Vanguard. Once the merger happens, the top 16 billion-dollar ETFs will all be from what I have dubbed ClayShares. I did confess my first reaction to the announcement at a personal level was disappointment: less choice potentially, and possibly less innovation. Of course, this was strictly from the vantage point of a customer and investor.
Spreading the wealth will benefit end consumers
Personally, I own or have owned ETFs from all these companies, as well as BMO and Horizons. With just seven or eight local players in the ETF space, there’s room for all of them and a case can be made for most of them making up at least a portion of the average investor’s portfolio.
BMO is good for equal-weighting and currency-hedged foreign ETFs. Claymore has some innovative foreign sector funds that often hedge back to the loonie and it offers the RAFI-based fundamental indexing funds on top of the traditional market-cap weighted ETFs that are the bread and butter of both iShares and Vanguard.
Powershares Canada provides another take on rule-based “intelligent” indexing. Horizons has leveraged and inverse ETFs that let you make bullish or bearish bets on particular segments of the economy and it also offers its actively managed “AlphaPro” ETFs. First Asset’s XTF Capital is also in the active space. And RBC ETFs so far has restricted itself to corporate bond ETFs.
This is only a broad-strokes overview, since many of these firms occupy multiple niches, both in equities and increasingly in fixed income. The point is that if there’s room for 50-plus mutual fund complexes in Canada, there’s certainly room for a dozen or so ETF providers.
Two-horse race for “Core” offerings?
The real battle, however, will not be over niche products but for being the indexed “core” of portfolios. That one, I suspect, will become a two-horse race.
It wouldn’t be good for consumers if a single firm accounted for 90% of ETF sales, whether that firm were BlackRock, Claymore or even Vanguard. As it stands, the giant is the combined “ClayShares” and the emerging giant-slayer is Vanguard. At least in this first year of its existence, it would be healthy for investors to spread some of the wealth to the newcomer.
Because of tax consequences, I wouldn’t be switching non-registered ETFs to Vanguard but I’ve certainly begun to put some new money into their six core funds, both equity and fixed income. And of course, there are no tax consequences to switching ETFs inside RRSPs, RRIFs or TFSAs, although there may be commissions to consider.
While Vanguard will likely be the cost leader in the Canadian market investors will have to do their own research as to the merits of putting the core of their portfolios into market-cap weighted ETFs like Vanguard’s (or indeed many of the iShares ETFs). I believe this is the best route to go for core positions but others may argue for fundamental or intelligent indexing or even active management.
It’s useful to get back to basics, which is why it’s useful to read here Vanguard’s The case for indexing: Canada, originally distributed last summer. Several useful charts show the performance (or lack of it) of actively managed Canadian equity funds, which it says average 2.23% expense ratios, compared to an average 0.79% for index funds. The spread is less for Canadian bond funds: 1.30% versus 0.69%.
The main event: XIU versus VCE
I said above the real battle will be about becoming the “core” position of indexed portfolios. This being Canada and investors here as elsewhere inclined to considerable home-country bias, it follows that the biggest single skirmish will be in Canadian equity ETFs.
It’s no coincidence Vanguard is being most aggressive in the pricing of its Canadian equity ETF: the Vanguard MSCI Canada Index ETF [ticker VCE/TSX], with a rock-bottom MER of 0.09% or nine basis points. This proxy for the broad Canadian stock market is up against the dominant iShares i60s [XIU/TSX], which has an MER of 0.17% or 17 basis points. That’s wonderfully low when pitted against any actively managed Canadian equity mutual fund but not low enough when Vanguard has entered the market.
As RRSP season progresses and into March, we’ll be conducting a few “live chats” with some of the major ETF players. The first is scheduled for Feb. 22nd. More details will be provided as the time approaches.
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