Vanguard throws down the gauntlet on fees

Price cuts on 11 ETFs reinforce firm's position as low-cost provider.

Rudy Luukko 8 October, 2014 | 2:00AM
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Management fees on 11 of Vanguard Investments Canada Inc.'s 21 exchange-traded funds, already cheap, have just become cheaper. In announcing the extensive fee cuts effective today, Vanguard threw down the gauntlet to its ETF rivals and to the Canadian fund industry as a whole.

The price reductions leave Vanguard either tied as the lowest-cost provider -- or else the cheapest of any fund manager -- in core categories including Canadian, U.S., international and emerging-markets equities, and Canadian fixed income.

In absolute terms, the fee cuts are pretty small. They range from four basis points in the case of Vanguard FTSE Canada Index VCE to a high of 10 basis points for Vanguard FTSE Emerging Markets Index VEE . (See table.)

But in percentage terms, fees on the 11 affected ETFs have been reduced by anywhere from 29% for two international equity ETFs to 58% for Vanguard FTSE Canadian High Dividend Yield Index VDY .

Vanguard Canada said its latest price moves lower the firm's asset-weighted average management fee -- which it says is already the lowest in the Canadian industry -- to 0.14% from 0.19%. Management-expense ratios will be recalculated for the affected funds at the end of the year, but Vanguard said it expects that the only additional fees and expenses payable on top of the management fee will be taxes.

Vanguard Canada's key competitive advantage is the backing of its parent, the giant U.S.-based Vanguard Group Inc., which now manages more than US$3 trillion globally. To put that total in context, it's roughly triple the size of the combined assets of all Canadian mutual funds and ETFs. (BlackRock Inc. BLK, the parent of the market-leading iShares family of ETFs in Canada, is even larger with US$4.3 trillion under management, the most of any company in the world.)

As part of their product strategies in Canada, Vanguard and BlackRock (as well as Invesco's PowerShares) are able to create Canadian versions of some of their U.S.-based ETFs. For example, five of the 11 Vanguard ETFs affected by today's fee cuts have U.S.-listed Vanguard ETFs as their underlying holdings. The Canadian ETFs are priced so that there is no duplication of fees.

An additional advantage enjoyed by Vanguard in waging price wars in Canada is its parent's ownership structure and break-even mandate. Vanguard Group is owned by its U.S.-domiciled mutual funds, so it is effectively investor-owned. "This structure aligns our interests with those of our investors and drives the culture, philosophy and policies throughout the Vanguard organization worldwide," said Atul Tiwari, managing director of Vanguard Canada, in the release announcing today's fee cuts.

Vanguard, which entered the Canadian ETF market in December 2011, is the fourth largest ETF provider in Canada. As of Aug. 31, according to the Canadian ETF Association, the firm had $2.9 billion in assets under management out of the ETF industry total of $73.9 billion. That translates into a 4% market share, up from 2.8% in December 2013.

According to more recent data from Vanguard, the firm's asset growth is gaining momentum. Vanguard says it ranked second in the Canadian ETF industry with positive net cash flows of $1.06 billion in the year to date through September, or 15% of the industry total.

At the 2013 Morningstar Awards, Vanguard Canada was the winner of the ETF Provider of the Year and Best Equity ETF awards. The award for equity ETF went to Vanguard U.S. Total Market Index ETF (CAD- hedged) VUS . This ETF, which wasn't affected by today's reductions, charges a management fee of 0.15%.

ETF Symbol New fee (%) Old fee (%)
Vanguard FTSE Canada Index VCE/TSE 0.05 0.09
Vanguard FTSE Canada All Cap Index VCN/TSE 0.05 0.12
Vanguard FTSE Canadian High Dividend Yield Index VDY/TSE 0.20 0.30
Vanguard S&P 500 Index VFV/TSE 0.08 0.15
Vanguard S&P 500 Index (CAD- hedged) VSP/TSE 0.08 0.15
Vanguard FTSE Developed ex North America Index VDU/TSE 0.20 0.28
Vanguard FTSE Developed ex North America Index (CAD-hedged) VEF/TSE 0.20 0.29
Vanguard FTSE Emerging Markets Index VEE/TSE 0.23 0.33
Vanguard Canadian Aggregate Bond Index VAB/TSE 0.12 0.20
Vanguard Canadian Short-Term Bond Index VSB/TSE 0.10 0.15
Vanguard Canadian Short-Term Corporate Bond Index VSC/TSE 0.10 0.15
Source: Vanguard Investments Canada Inc.

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About Author

Rudy Luukko

Rudy Luukko  Rudy Luukko is a freelance writer who contributes to Morningstar.ca on topics involving fund industry trends and regulatory issues. He retired in May 2018 from his position as editor, investment and personal finance, at Morningstar Canada, where he had worked since 2004. He has also worked as an editor and writer for various general, specialty and institutional media, and he has co-authored courses for the Canadian Securities Institute. Follow Rudy on Twitter: @RudyLuukko.

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