Vanguard Drops the Gloves

It’s not easy to make a splash in the crowded ETF space these days. Many of the new products we’ve seen in the last year or so have been clones of existing ETFs or exotic specialty funds. Any Canadian investor who wants to build a diversified portfolio with ETFs has more than enough choice already.

That was the challenge for Vanguard Canada when they announced they’d by launching a family of ETFs this year. Given the company’s reputation for rock-bottom fees, there was a lot of speculation about whether they would try to compete on price. Even if none of their ETFs are radically different from their competition, they could grab some market share from their competitors by offering similar products with much lower fees.

Well, Vanguard has just released the costs of its new ETFs, which will start trading in the coming weeks. It looks like they’ve lived up to that promise:

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Note that the above figures are the management fees, not the entire management expense ratios (MERs). According to the press release, “Vanguard expects the MERs of its ETFs to be substantially similar to their management fees, as the Vanguard ETFs should incur only nominal other costs that would be included in the MER calculation.” They will have to add the 13% Ontario HST, which would bring a 0.20% fee up to 0.23%.

Even if you add a few basis points for HST, these are very competitive fees: in fact, all of them are lower than comparable products from iShares, Claymore and BMO. The Vanguard  MSCI Canada (VCE) will be the second-cheapest ETF in Canada, behind only the Horizons S&P/TSX 60.

I would suggest that Vanguard has now changed the game in the Canadian ETF market. Any bank or other financial institution that is planning to launch a family of broad-based ETFs will likely find there is no way to compete: it was hard enough to go against iShares, and now the pricing pressure is all but insurmountable. Any new players will probably stick to specialized products, wrap programs, or some other strategy to package and sell ETFs through advisors.

In other news…

We’ve just updated the Model Portfolio performance results for the period ending October 31. The year-to-date performance of the Complete Couch Potato is 1.28%—hardly cause for dancing in the streets, but given the state of the global economy and the extreme daily volatility, that’s a surprising result. Have a look at the five-year performance numbers of the major asset classes: with a couple of exceptions, these are not nearly as bad as you might think considering this period includes the 2008–09 financial crisis and this summer’s huge declines.

Many thanks to everyone who attended or tuned in to the ING DIRECT panel discussion on Wednesday evening. I enjoyed meeting the readers who came by to say hello in person, including Mike from MoneySmarts, and hearing from those who Tweeted their comments. It was an honour to share the stage with Rubina Ahmed-Haq and Ellen Roseman. Preet Banerjee was also present.