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Oct 19 2010

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Why Canadians might actually say “No” to Vanguard





Canadians, it seems, would swarm around a newly proposed Vanguard investment option like a batch of northern Ontario mosquitoes to an open arm.

And why not? As the famous, low cost provider of index funds, there’s no doubt that Vanguard offers the cheapest investment services on the planet.

But if Vanguard moved to Canada, would they treat us like brothers or cast us off as undesirable outback dwellers?

We have reasons to suggest they could choose either option.

Yes, Vanguard funds in Canada could end up being cheap

Sailing to the UK to open shop, Vanguard offered low cost indexed products that put Richard Branson’s Virgin indexed products to shame. It was Branson who said in his autobiography: “After Virgin entered the financial services industry, I can immodestly say it was never to be the same again…We never employed fund managers, some of the world’s most highly paid people, since we discovered their best-kept secret: they could never consistently beat the stock market index” (pg. 405, 2007)

Right you are, Sir Richard!

I’m a huge fan of this adventurous billionaire, but charging 1% annually for a UK index fund is just a tad… rich.  … read more

Vanguard UK, on the other hand, looks a lot like Vanguard USA. With a UK index charging just 15 basis points, Sir Richard’s UK index is 566% dearer. With costs like that adding up, Branson could transcend from famous balloon travel to famous space travel—thanks to the profits he makes.




But if Vanguard jumped the border to Canada, could they end up gouging Canadians?

OK—this is all going to be relative. Canadians pay the highest investment fees in the world, so just about anything will be an improvement. But what if Vanguard Canada charges the same fees that Vanguard Australia does?

First of all, fees Down Under for actively managed “Unit Trusts” (mutual funds) rival Canada’s anyway. They’re regularly more than 2% annually. But Vanguard Australia has some ridiculously expensive products.

Their Australian shares stock index charges 75 basis points for accounts below $50,000. And even though the fees lower as the account grows, they still get 0.75% on the first $50,000 every year.

Vanguard Australia management costs:

  • First $50,000 is 0.75% p.a
  • Next $50,000 is 0.50% p.a
  • Balance over $100,000 is 0.35% p.a

So what do you think? Would Vanguard give us a gentleman’s shake—or toss us into The Outback? What’s your call?





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/2010/10/why-canadians-might-actually-say-no-to-vanguard/

21 comments

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  1. avatar
    Canadian Couch Potat

    I suspect you're right, Andrew. I actually don't think Vanguard will come to Canada anytime soon, but if they do, I don't think we should be expecting funds with MERs of 0.10% like they get in the US. There is just no way they would make any money doing that in a small country. Fortunately we can buy their ETFs!

  2. avatar
    Kevin@InvestItWisely

    ETFs are always possible, but that's unfortunate for many people who just go with their bank mutual funds! At least some banks are not as bad as others (IIRC the MERs on TD eSeries was much better than the other banks)

  3. avatar
    Mich@BeatingTheIndex

    ETFs will remain the alternative for low cost investing until we see the gift Vanguard brings along if they decide to show up in Canada!

  4. avatar
    Financial Cents

    What about economies of scale, meaning, we don't have it here in Canada vs. the U.S.?

    I also think Vanguard hasn't made it to Canada because of our lack of sole-financial regulator. Will they come despite that? Hard to say. As always, time will tell :)

    For sure, Canadians pay the highest investment fees in the world, but when I look at ETF products like XIU and XIC, for equity indexes, they are pretty cheap. The savings with Vanguard would be marginal in comparison to those iShares products. If Vanguard Canada charges the same fees that Vanguard Australia does, investors with a smaller portfolio (<$50 K) would probably be paying more than existing iShares or Claymore products.

    All this said, I need to read up on Dan's blog (and achives of yours Andrew) as I am considering buying a Vanguard ETF to diversify my RRSP. I only keep ETFs and U.S. dividend-payers in there.

    Great post as usual Andrew!

  5. avatar
    Andrew Hallam

    @Canadian Couch Potato

    Hey Dan,

    I do wonder about Britain though. I think Virgin Money has a huge share of the UK market. But England itself only has about triple our population, right? (I haven't looked that up, so I could be talking out of my left ear on the population of the UK) But I can't be too far off. Despite not having a huge population, Vanguard UK has some really cheap indexed options, in a market that can't be all that big. It's interesting, isn't it?

  6. avatar
    Andrew Hallam

    @Kevin@InvestItWisely

    Hey Kevin,

    I guess ETFs are great for those who have a bit of money already. But it's tough for those investing $50 a month to think of giving away 50% of their monthly deposit towards commissions on small accounts.

    I think about how young I was when I started, and the actively managed fund companies in Canada made it very easy for me to automatically deposit small amounts on a regular basis. I guess we do have e-Series Funds. But no TD rep is ever going to tell a young investor that they exist. They're trained to move clients towards their most expensive products. After having some candid conversations with a couple of TD reps, I know this to be a fact.

    Your focus on the little guy is a good one Kevin. You've mentioned before, that you don't mind if ignorant wealthy people get hammered, financially, by fees they pay because they don't do their homework. But it's the little guy (as you often point out) who gets hurt most because he can't really get off the ground.

  7. avatar
    Andrew Hallam

    @Mich@BeatingTheIndex

    You're right Mitch—but only for those who already have money. The idea of saving for a year to buy an ETF isn't going to be much incentive to a young person wanting to dollar cost average. I hope Vanguard does arrive, and I hope they give Canadians a fair shake.

  8. avatar
    Andrew Hallam

    @Financial Cents

    It looks like Dan has a great, recent post on that last query of yours Mark.

  9. avatar
    Kevin@InvestItWisely

    <blockquote cite="#commentbody-1318">

    Andrew Hallam :

    @Kevin@InvestItWisely

    Hey Kevin,

    I guess ETFs are great for those who have a bit of money already. But it’s tough for those investing $50 a month to think of giving away 50% of their monthly deposit towards commissions on small accounts.

    I think about how young I was when I started, and the actively managed fund companies in Canada made it very easy for me to automatically deposit small amounts on a regular basis. I guess we do have e-Series Funds. But no TD rep is ever going to tell a young investor that they exist. They’re trained to move clients towards their most expensive products. After having some candid conversations with a couple of TD reps, I know this to be a fact.

    Your focus on the little guy is a good one Kevin. You’ve mentioned before, that you don’t mind if ignorant wealthy people get hammered, financially, by fees they pay because they don’t do their homework. But it’s the little guy (as you often point out) who gets hurt most because he can’t really get off the ground.

    Yep, the problem unfortunately is that there is little informed consent. I focus on the little guys because they simply don't know how they are getting taken advantage of. They haven't had the benefit of reading andrewhallam.com. ;) If the little guy was a millionaire senior, I would still feel for them because they are still being taken advantage of.

    When a rich guy goes to gamble away millions at a casino or gamble in a hedge fund, *and he is perfectly aware of what he is doing*, I then don't feel sorry. I feel bad for a big loss, but if the guy knew what he was getting into, then he must accept responsibility for that in the end.

    I think people are giving the banks far more trust and credit than they deserve. I don't suggest putting on a tinfoil hat, but it's healthy to be skeptical when someone says that they have your best interests at heart, whether it be a financial advisor or a politician. Unless that person has a legal and fiduciary responsibility and they are *obligated* to act in your best interests, then remain skeptical. Even if they do have that duty, you should still cover your bases. You might still make a mistake and get swindled, but at least you improve your odds.

    Do you think this is a basic human psychological problem? Or perhaps schooling might have something to do with it? In many cultures, kids are taught to unquestioningly obey their teachers in elementary school. While physical discipline is out, that mental fear and obedience of authority is still instilled in our youth. Not to put on the tinfoil hat again, but… is this still a good idea? Or should we be teaching our kids to think for themselves, and that figures of authority should never be blindly obeyed simply because they wear a uniform… or a nice suit & tie.

  10. avatar

    Now that Vanguard has moved into Canada as of the beginning of January what do people think of their funds that they are offering? I suppose its better than a TD index fund but I'd like to hear from others.

  11. avatar
    Peter

    Seems a bit odd this appeared on twitter today as this article is somewhat outdated. Andrew could you update this article at least with a link to your thoughts on Vanguard as an option for Canadians now?

  12. avatar
    Andy

    I’ve been reading your book and I have looked into the Canadian Vanguard…i’m curious as to your opinions of Vanguard for canadian investors now that it’s here.

    1. avatar
      Andrew Hallam

      Hi Andy,

      They are excellent products. To buy them, you’ll need to buy open a brokerage account. Vanguard has not yet entered Canada as a standard index mutual fund provider, as they have in the UK and Australia.

      But the ETFs are superb. Here’s a link to the product list. https://www.vanguardcanada.ca/individual/etfs/etfs.htm

  13. avatar
    Andy

    Thanks for such a quick reply, Andrew. Just to clarify, you mentioned that ETFs are worthwhile if you’re not going to invest regularly or if your account balance is large, which I’m assuming means in the hundreds of thousands of dollars. For a person just looking into investing for the first time and with a “lower” balance, would this still be the way to go? I’m reading the information on the website you provided and the minimum investment is $3000 which is not at all to high for me, but would ETFs still be a better choice than the TD e-series index funds for someone who’s account balance would be less than 100 000?

    1. avatar
      Andy

      Hi Andrew,
      Since my last comment I have done some more research and as a first time investor of 28 years, I’m thinking that ETF’s might be a little over my head. (But please let me know otherwise). I should also state that I’m Canadian but living abroad, however i still have my Canadian bank account and a driver’s liscense (but it expires in 2 years and I will be unable to renew it since I have not been making money nor paying taxes in Canada.) In your opinion, would the TD e-series index funds be my best bet, investing 30% in canadian bonds, 35% in canadian index funds and 35% in international index funds?

      I appreciate your time and wisdom!
      Andy

      1. avatar
        Andrew Hallam

        Hi Andy,

        As a non resident, you might not be able to buy the e-Series funds. But opening and managing an account of ETFs is very simple. Here’s a link that might help you. In it, I have listed some ETFs you can buy. If you are currently visiting Canada, you could open a non resident account with TD Waterhouse and buy these products yourself, online. If you are abroad, currently, you could use one of the brokerages I list in this link: http://andrewhallam.com/2014/01/expat-index-investors-should-duck-u-s-estate-taxes/

        Cheers,
        Andrew

    2. avatar
      Andrew Hallam

      Andy,

      Offshore brokerages will usually charge a minimum of $25 per trade, which is why I said $3000 is a good starting point. Literally, you could spend as little on them as you want, but why do so when getting hit with at least a $25 commission? Using TD Waterhouse, you would pay just $9.99 per trade. Smaller sums with them make a bit more sense because commissions are lower.

  14. avatar
    Kim Guiry

    Thanks for the information. As a Canadian non-resident living in the Philippines, I have recently tried to set up an account with TD International and DBS Vickers and was told that it was not possible. Vanguard, at the moment, is not able to assist individual buyers in Asia.

    Appreciate any suggestions?

    Thanks!

    1. avatar
      Andrew Hallam

      Hi Kim,

      Call DBS Vickers back. If you can take a trip to Singapore, open a Singapore based savings account first, you can open a brokerage account with DBS Vickers. Call them back and speak to someone who can confirm and take their name before flying to Singapore. Before doing so, give the folks at Saxo Capital markets a call first. You may be able to open such an account without taking a trip.

      Andrew

  15. avatar
    Kim Guiry

    Thanks, Andrew!

  16. avatar
    Kim Guiry

    Thanks, Andrew! Will try to contact Saxon Capital.

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