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May 16 2010

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Vanguard Investments for Canadians – Why Not?




Living abroad as an expatriate gives me a pretty wide lens when comparing different investment products. 

But without a doubt, the best investment service company in my view is Vanguard.

The non profit mutual fund provider specializes in low cost indexes and mutual funds.  And we all know that low cost indexes, after all taxes and expenses, give the stock investor, bond investor or real estate income trust investor the best odds of success—compared to the alternatives offered by “for profit” companies selling actively managed mutual funds. …read more

Knowledge about the superiority of indexes spread north.  And the Canadian banks answered the queries by offering their own “in house” index funds.  Let me be clear on this.  It’s better to be a shareholder in a Canadian bank, or a Canadian mutual fund company than it is to invest in their funds (even their index funds) …read more

Bank shareholders, of course, want to maximize profits.  Fair enough.  As a shareholder, you’d be happy with the Canadian banks as a whole.  History has proven that it’s far better to invest in the banks than in their fund products.  So while you might own shares in Canadian banks, you’re better off avoiding their fund products.  And as a capitalist, you’d keep this quiet, right?  After all, as a bank shareholder, it benefits you when your bank charges 2.5% annually for actively managed mutual funds and nearly a full percentage point for their indexes.  In fact Canadian banks and Canadian fund companies get away with having the highest investment management fees in the world. …read more

How much cheaper are indexes south of the border?  You can buy a Vanguard total stock market index charging 0.13% annually.  A typical Canadian bank index will cost you more than five times as much.  Compound the difference over an investment lifetime and we’re talking about a huge sum of money.  If you invested $10,000 over 40 years, you’d eventually have opportunity costs amounting to roughly $70,000 if you had to pay an extra 77 basis points annually for 40 years.

In other words, with a low cost index like Vanguard’s, you’d have $70,000 more money at the end of a 40 year investment period (considering $10,000 invested once, and compounding over 40 years)  The Canadian banks get to smile.  That 77 basis point “spread” is what they charge, above the more competitive Vanguard index fees. 

Wouldn’t you rather have that $70,000 in your pockets—and not the bank’s?  If you plan to invest more than $10,000 over your investment lifetime, you’d be talking about a much larger difference.

Now enter Vanguard on a beautiful white horse to save little investors everywhere.  But what was their first stop?  Unfortunately, it wasn’t Canada.  Vanguard set up shop in the United Kingdom and Australiaoffering dirt cheap indexed products.

I’ve helped a couple of Australian friends set up Aussie based Vanguard accounts from Singapore.  Another British friend has it going on nicely with Vanguard UK.

But why isn’t Vanguard helping out Canadians?  Are we benign enough to keep paying the highest mutual fund fees in the world?

Please Vanguard, will you come?

Note—this letter has been sent to Vanguard.




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About the author

andrew hallam

I'm a freelance finance writer, lucky enough to have been nominated as a finalist for two Canadian National Publishing Awards. I'm also the author of Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School, a book explaining how I became a millionaire on a teacher's salary, while still in my 30s. Working to empower people financially, I'm available to motivate and inspire people on basic retirement planning and index investing. I'm happy to comment on your questions, first, please read the Terms of Use.

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