Vanguard Canada is still a scrappy newcomer to the Canadian scene, where it has to face off against much bigger competitors in the battle for investors' affection, but it's growing quickly by offering exchange-traded funds (ETFs) designed to appeal to cost-conscious savers.
With the announcement of five new ETFs this week, the firm now features 16 low-cost index funds with an industry-low average management fee of just 0.21 per cent.
Joining the Vanguard lineup is a Canadian All Cap Index fund, two U.S. Dividend Appreciation Index funds, a U.S. Total Market Index fund and a developed world (outside of North America) index fund. Here's where they may fit into your strategy.
Vanguard's FTSE Canada All Cap ETF is designed to provide more diversification than funds that track the 60 stocks in the S&P/TSX 60 index. Carrying an expense ratio of just 0.12 per cent, the new ETF contains 256 stocks, spanning small, mid and large capitalizations.
I've written a fair bit about the performance liability of foreign ETFs hedged to the Canadian dollar. Over long periods, hedged funds may underperform their non-hedged counterparts by a percentage point or more each year. Fortunately, Vanguard Canada has created its FTSE Developed ex North America Index Fund as its first non-hedged international ETF.
The fund, as the name suggests, holds no emerging markets shares or North American equities. Instead, it spans 1,291 stocks from other developed countries. It's not as diversified as the iShares MSCI EAFE IMI, which holds 2,479 stocks, but Vanguard undercuts its competitor's fees by two basis points, charging just 0.28 per cent.
Dividend lovers may find a lot to like in Vanguard's U.S. Dividend Appreciation Index funds. Available in a hedged and non-hedged version, these ETFs hold 146 U.S. companies with reputations for increasing their dividends over time.
How does that stack up to competitors? Vanguard's dividend ETFs hold 72 more stocks than the iShares U.S. High Dividend Equity Index and 94 more stocks than the First Asset Morningstar U.S. Dividend Target 50 Index. Investors in search of wide diversification will find that appealing.
The unhedged version has an expense ratio of 0.28 per cent, making it the cheapest in its class and the only one that isn't hedged to the Canadian dollar.
The final newcomer is the U.S. Total Market Index fund. It's a non-hedged fund that holds 3,554 U.S. common stocks, and charges just 0.15 per cent a year.
Clearly, iShares Canada is still the heavyweight in the ETF division, with assets under management nearly 40 times higher than Vanguard's. But with its aggressive pricing, Vanguard is doing its upmost to win converts. It lowered its expense ratio from 0.49 per cent to 0.33 per cent for its Emerging Market ETF, retaking the cheapest-in-class title previously held by BMO's Emerging Market Index, which charges 0.45 per cent.
Vanguard expects to soon offer a couple of foreign bond ETFs as well: a U.S. Aggregate Bond Index (VBU) with expenses of 0.25 per cent and a Global (excluding U.S.) Aggregate Bond Index (VBG) costing 0.35 per cent.
Vanguard's U.S.-listed ETFs are still cheaper than their Canadian versions, but that doesn't mean you shouldn't give the TSX-listed funds serious consideration. Outside of a tax-sheltered account, the uncertain rules of U.S. estate taxes could provide your heirs with an unexpected uppercut. There's also the added cost of converting Canadian dollars to greenbacks every time you make a trade.
While cheaper U.S. versions could still be better for some accounts, Vanguard Canada is clearly interested in making the case for its domestic alternatives. If it fights true to form, their fund expenses will continue to drop.