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Here’s how you can access Vanguard ETFs in Canada and some pros and cons of ETFs to consider.
I’ve heard good things about Vanguard investment accounts in the U.S., owing to the low cost of the investment. Is there a Canadian equivalent and is it as beneficial?
—Kate
The Vanguard Group, Inc. is one of the largest global investment companies. It was founded in 1975 by John Bogle, who is one of the grandfathers of index fund investing. Vanguard is the second biggest exchange traded fund (ETF) company in the world, second to Blackrock, Inc.’s iShares. Vanguard is the largest mutual fund company in the world.
Vanguard expanded to Canada in 2011. Its fees at the time were significantly lower than the rest of the industry. According to the company, Vanguard has cut its average asset-weighted management expense ratio (MER) by almost half. It says its current MER is 48% lower than the industry average.
You can buy Vanguard Canada products here at home, Kate. You can buy many of its U.S. products as well. Vanguard’s U.S. ETFs trade on the New York Stock Exchange. Its U.S. mutual funds are generally not available to Canadian investors.
Vanguard is one of the biggest domestic ETF providers in Canada. As of July 31, 2023, the Canadian ETF Association listed it as the third biggest by assets under management after BlackRock Canada (iShares) and BMO Asset Management.
Unlike the top two, who are neck and neck with 146 and 144 ETFs, respectively, Vanguard has a much narrower line-up of 37 ETFs.
Vanguard definitely offers low-cost investment options to Canadian investors, Kate. You cannot open an account with Vanguard, though. Most investment advisors in Canada can access their products, and you can buy them if you have a discount brokerage account. Some advisors are limited to offering mutual funds due to their securities licenses. Others are limited to offering proprietary funds from their own company. And others may prefer to use individual stocks and bonds, or other investment products for their clients.
ETFs are a popular investment because they’re a low-cost way of diversifying your portfolio. ETFs tend to be passive, which is one of the reasons they have relatively low fees. Rather than having a management team researching which investments to buy, they simply buy the market. For example, an S&P 500 ETF might own all 500 stocks that make up the index, rather than spending time and money trying to figure out which ones to own.
Another reason the fees are relatively low is that they do not have embedded fees payable to an investment advisor. Mutual funds tend to have higher fees than ETFs, because some of them pay trailer fees to the advisor who manages the investment account. When advisors use ETFs, they typically charge a separate management fee that is not included in the fund’s MER.
The important thing to understand about ETFs, Kate, is that they are not all low-cost and passive. Some ETFs are active, and some are risky because they use leverage, which can magnify gains as well as losses. You can buy inverse ETFs that go down when markets go up as well.
Likewise, not all mutual funds have high fees and are active—there are low-cost and passive mutual fund options available to investors.
Even though an ETF may have a relatively low fee, if an investor uses it incorrectly, it can be a bad investment. Someone who owns an equity ETF that tracks a stock market may be making a bad investment choice if they plan to use the money in the next year for a home down payment. Low fees do not matter if the investment’s risk does not match the investor’s time horizon or comfort level.
Not all ETFs offer the same level of diversification. If an investor puts all their money in an ETF that tracks the global gold index or the utilities index, for example, they may have an undiversified portfolio.
And like all investments, ETFs have risks. For example, an investor can buy an ETF that tracks long-term bonds. When interest rates rise—as they have since March 2022—bonds decline, and the drop is steeper the longer the term.
ETFs can be a tool for investors who work with advisors or who manage their own investments. Vanguard Canada’s ETFs are relatively vanilla compared to some of the other ETF providers, so that may help keep an inexperienced investor out of trouble. Vanguard ETFs may (or may not) be the right products for you, Kate. Talk to your advisor or if you are self-directed, and make sure you understand what you are investing in and why before you invest.
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