Low-fee Vanguard on deck for the Canadian market?

This coming Oct. 8 is a notable day for anyone who understands how important low fees are to smart investing.

On that day, the U.S. fund giant Vanguard will host an investor forum in Toronto for pension fund managers and investment advisers. Events like these happen all the time and the majority are equal parts infomercial and cliché-fest.

The Vanguard event may be self-promotional, too, but there's a greater good to consider here. Vanguard is the low-cost leader in index investing and the Toronto session is a signal of its interest in the Canadian market.

Vanguard doesn't offer its low-fee index mutual funds in the Canadian market. However, the firm's lineup of 39 exchange-traded funds is listed in New York and thus available to anyone with a brokerage account.

Still, it would be a lot more convenient, not to mention cheaper, if Canadians could buy Vanguard ETFs listed on the Toronto Stock Exchange. How about it?

"I think our products would be very useful to Canadian investors and I know that we're taking a very hard look at what we're doing there and how we can improve that," Rebecca Cohen, Vanguard's senior manager of public relations, said yesterday from the company's headquarters in Malvern, Pa.

Ms. Cohen said nothing is imminent in terms of TSX-listed Vanguard ETFs. But the firm does employ a sales executive whose job it is to encourage Canadian pension fund managers to use Vanguard ETFs.

Though popular with U.S. investors, it's highly unlikely that Vanguard's index mutual funds will ever be sold here. For one thing, it's a lot more cost-effective to use ETFs to move into a new market.

Mutual funds need managers, researchers and office staff to deal with clients and advisers. ETFs track indexes, so they don't need managers, and they don't need a customer relations staff because they're sold on the stock market. Now you understand why the cost of owning an ETF is so much lower than a mutual fund.

Vanguard's products are cheap even by ETF standards, and the reason for this further explains why we won't see the firm's index mutual funds here. Ms. Cohen said Vanguard is investor-owned, which means it's kind of like a co-op that operates to cover expenses and not to generate profits. With this format, it's hard to justify the massive expense of starting up a Canadian operation to clients.

On the other hand, Vanguard's structure enables it to be the low-cost option in the ETF sector, where cheap fees are one of the biggest differentiators between products.

"We run all of our funds at cost, and we're pretty successful at reducing costs here," Ms. Cohen said. "If we generate too much in expenses, we just rebate that back to shareholders the following year in lower expenses."

If Vanguard sounds too good to be true, it's worth noting that its clients sometimes have to pay higher fees. That was the case recently with one of the firm's most popular products, the Vanguard Total Stock Market ETF (VTI), which covers a broad index of large, medium and small U.S. stocks.

Ms. Cohen explains that costs for this ETF were cut in the past year, but declining assets meant that the fees paid by investors increased to 0.09 per cent from 0.07 per cent. At this level, VTI is tied for cheapest stock market ETF in North America with the iShares S&P 500 Index Fund. What sets VTI apart is the fact that it offers convenient one-stop shopping for exposure to the entire U.S. market, whereas its competitor covers only the big blue-chip names of the S&P 500.

Vanguard's other ETFs are cheap, too, especially in comparison with what Canadian investors are paying. The cheapest TSX-listed ETF offering U.S. market exposure costs 0.24 per cent to own, although that includes the benefit of currency hedging to block out distortions caused by changes in the Canada-U.S. exchange rate. If you bought VTI, your returns would suffer if our dollar rose, and benefit if it fell.

Buying VTI also exposes you to the fat foreign exchange fees charged by brokers when you use your Canadian dollars to buy or sell investments priced in U.S. dollars. Having a version of VTI listed on the TSX would address this problem. Canadian money would still have to be converted into U.S. dollars, but Vanguard would handle this for investors at what would presumably be a much cheaper rate.

With Bank of Montreal's recent entry into the ETF market here in Canada, we now have four competitors offering a wide selection of 121 funds. The only sensible game plan for a new competitor would be to offer lower fees. Over to you, Vanguard.

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The Vanguard option

Here are two exchange-trade funds offered by the U.S. firm Vanguard.