If you thought ETFs were cheap before, take a fresh look. Vanguard, which is known for its low costs in the U.S., has slashed the fees on 11 of its Canadian-based products.
It's the latest salvo in a price war that has seen Vanguard, a newcomer to Canada with a relatively small market share, put pressure on major competitors such as BMO and BlackRock's iShares line-up.
In two cases, the Vanguard cuts reduce the management fee to a rock-bottom 0.05 per cent: the Vanguard FTSE Canada Index ETF (VCE), which was previously at 0.09 per cent, and the Vanguard FTSE Canada All Cap Index ETF (VCN), previously at 0.12 per cent.
The largest cuts, of 10 basis points each, were in the Vanguard FTSE Canadian High Dividend Yield Index ETF (VDY), which drops to 0.2 per cent from 0.3 per cent, and the Vanguard FTSE Emerging Markets Index ETF (VEE), which moves down to 0.23 per cent from 0.33 per cent.
Other funds affected are the Vanguard S&P 500 Index ETF (VFV) and the Vanguard S&P 500 Index ETF (CAD-hedged) (VSP), both of which will see the fee drop to 0.08 per cent from 0.15 per cent; the Vanguard Canadian Short-Term Bond Index ETF (VSB) and the Vanguard Canadian Short-Term Corporate Bond Index ETF (VSC), which will now cost 0.1 per cent compared to 0.15 per cent previously; the Vanguard Canadian Aggregate Bond Index ETF (VAB); and the Vanguard FTSE Developed ex North America Index ETF (VDU) and Vanguard FTSE Developed ex North America Index ETF (CAD-hedged) (VEF), which will have their fees cut to 0.2 per cent from 0.28 per cent .
Vanguard Investments Canada entered the Canadian market in December 2011 with six ETFs. The company now offers 21 funds and has almost $3-billion in assets under management (AUM) and a 4 per cent market share. It's still a very small player in comparison to industry giant BlackRock Canada, which has about $46-billion in AUM and a 62 per cent market share. But Vanguard's aggressive pricing policies have shaken up the industry, to the benefit of investors.
Now the question being asked is whether the ETF price war is spreading to the mutual fund industry, where management fees are much higher. On Sept. 29, Mackenzie Financial implemented cuts of between 0.25 per cent and 0.5 per cent on 13 funds. The company also lowered administration charges on its class F funds, which are used in fee-based accounts, as well as on many class A, C, SC, and T series.
In terms of dollar savings to investors, it's a drop in the bucket. But if other fund companies follow suit, it could be the start of something bigger. Studies have shown that Canada's mutual fund expenses are among the highest in the world. The industry has consistently denied this but may be starting to feel the heat from the bargain basement ETF sector.