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May 16 2010

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Vanguard Investments for Canadians – Why Not?


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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.

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.

Permanent link to this article: http://andrewhallam.com/2010/05/vanguard-investments-for-canadians-why-not/

6 comments

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  1. avatar
    Financial Cents

    Hey Andrew,

    I found this information on their website:

    "Our clients' interests are our only interests." – nothing speical or new to me.

    But I did not know:

    "We're owned by the funds that are owned by clients like you." Therefore, as they say on their site: "…we have no competing loyalties. We don't pay profits to a private owner or stockholders."

    This tells me the Vanguard Group is basically a conglomerate of mutual funds – a HUGE one at that – with $1.3 T in AUM my research found.

    Again, I wonder if this structure, VGI owned and funded by funds, is the regulatory hurdle (and model) they can't overcome in Canada?

  2. avatar
    Financial Cents

    Hey Andew – a thought…

    How about an online petition amongst bloggers or other personal finance and investing advocates? How good is your webmaster at developing this kind of thing?

    I got a similar idea, in more detail, from a visitor to my site called "cynical investor" who recommended the following, which I think is a great idea:

    1) Use or create a 'Put your money where your mouth is' website – where people pay $0.99 or $1.99 to e-sign, so no duplicate signatures;

    2) Money collected will be donated to a charity for example UNICEF (on behalf of Vanguard);

    3) At the end of the signature campaign, send message/petition to Vanguard;

    4) Send cash to UNICEF.

    Everybody wins. Thoughts? Sure, logistics, but potential…

    I think cynical investor has already floated this idea to thickenmywallet; a lawyer. I think this campaign would get some major media attention, plus, highlight arguments and premises of your site – using low-cost-index investing to help you get to finanical freedom.

    Do I have you intrigued, inspired or fearful? All the above? Cheers.

  3. avatar
    Andrew Hallam

    Financial Cents:

    This does sound fascinating. I know a couple of guys who write for the Globe and Mail, and if we do this right, they could end up giving us some good exposure (maybe!) if I beg, and if they find it interesting enough. And I do think they'd find it pretty interesting.

    Here's a fun thought. Because Vanguard is non-profit, the money could be sent to Vanguard itself. Any "profits" they make go towards lowering fees anyway. Our mission could be based on helping the regular investor. Can you think of how bizarre a headline that would be? "Why did Canadian investors just donate $100,000 to a U.S. fund company?"

    What do you think?

    I am very much interested.

  4. avatar
    Financial Cents

    Count me in. What do I have to lose to be a part of this? :) Go ahead and see what your guys at the Globe think of this… Again, although Vangaurd is not for profit, I prefer the charitable causes; UNICEF, Save the Children (Haiti), cancer research, but I don't mind donating to Vanguard as well. I'll follow your lead Andrew. After you talk to your friends at the Globe, just need a plan. I think it would be prudent to include cynical investor as well – since he floated the idea.

  5. avatar
    Dave the Admin

    @ FinancialCents

    let me look into it — and I'll get back to you soon…

    Question… can we make this …ahem… a 'mutual' jointventure where all contributors would/could add posts and copy comments etc? (Even a paragraph on the website with a link back to the article on your main website would be good…) But we will need ongoing material to post which can be emailed to me… I would be happy to make the site and maintain it as my ongoing contribution.

    I propose we donate to both Vanguard & a Children's charity 50/50 … the Charity to be the world wide children's charity that is also based in Canada "Variety"

  6. avatar
    Financial Cents

    Hey Andrew,

    Looking forward to hearing what Ian McGugan has to say. Keep me posted…

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