By Dan Hallett, CFA, CFP
Late last week, the media was buzzing about indexing giant Vanguard’s entry into the Canadian investment fund market. (See today’s Globe & Mail and National Post for related stories.) Today, Vanguard officially announced the birth of Vanguard Investments Canada Inc and its plans to officially launch investments funds for this market. While Vanguard is likely to exert price pressure in Canada’s relatively expensive fund industry, I expect any price war to be targeted – not a broad-based industry battle. The precise impact, however, depends on exactly what Vanguard offers to Canadians.
Many are hoping that Vanguard’s Canadian launch will trigger an all-out price war in Canada, which has been criticized for its mutual funds’ high fees. Given the background of the person leading Vanguard Canada, many are also assuming that Vanguard will launch ETFs. Vanguard notes that it will initially offer products through investment advisors. And I interpret the wording of their press release to imply that they will start with a family of mutual funds – perhaps with A and F series versions. But this is my speculation based on the limited information released thus far. If they were launching ETFs, there would be no reason to highlight the plan to distribute through advisors since they’d be accessible to whoever wants them and under whatever pricing structure made sense for each investor type.
If my suspicion is correct, the greatest pricing pressure – at least initially – would be targeted at firms like DFA Canada, Invesco Trimark (PowerShares funds) and BMO (funds of ETFs). Vanguard’s initial focus on advisory networks in Canada also speaks volumes about what it takes to succeed in the Canadian market since even ETF providers tend to focus on the institutional and advisory segments to grow their businesses. Still, past efforts to drive costs down for do-it-yourself investors haven’t had a bleed-over effect to the universe of load mutual funds in Canada.
Cheap index funds are not new in Canada
In 1998, RBC and Altamira were in a bit of a price war of their own. Altamira launched its Precision line of index funds, sporting MERs of about 0.50% annually – then the cheapest index funds in Canada. RBC Asset Management lowered its index fund MERs to match Altamira’s fees. Despite its reputation as a high-cost mutual fund market, Canada was also home to the first ETFs – TIPs 35 and HIPs 100 – which were priced at a razor thin 0.04% annually. The iShares funds acquired those ETFs from the TSX in 1999. In that same year, TD Asset Management launched its e-series of index funds, which carry fees that rival those of ETFs.
Subsequent years saw the ETF industry flourish, growing seemingly with every passing week. While we have seen a bit of a price war within the ETF space in more recent years – i.e. via BMO’s ETF launches and BetaPro’s dirt cheap synthetic ETF - this has resulted in limited pricing pressure in the world of actively managed funds. Indeed, Canadian investors haven’t embraced the efforts of newer low-fee entrants. We can look back to Scudder Canada’s 1995 launch as one example. Their funds sported 0% MERs for the first year and were heavily subsidized thereafter and had very good performance. But they didn’t attract enough money to make a go of it and they eventually were acquired by Maxxum, which itself was folded into Mackenzie around 2002.
Tom Bradley’s Steadyhand Investment Funds – a newer low-fee player - offers a simple and attractive offering, and one that offers loyalty discounts for larger investments and longer holding periods. And yet investors haven’t embraced the firm as much as I thought they would given how many seemingly complain about fees. This may be an example of a loud minority making noise while the majority are silent or are too busy to bother with the issue of fees.
Having said all of that, the precise impact of Vanguard’s launch can’t be known with any certainty until they unveil at least a preliminary prospectus.
My Vanguard wish list
I hope that Vanguard launches a family of low-cost mutual funds in Canada that cater to both advisors and investors. Canadian investors, advisors and institutions have had broad-based access to Vanguard ETFs for a decade so it’s not clear that there is great motivation for them to launch a TSX-traded ETF family. Plus, I happen to agree with John Bogle, who strongly opposed Vanguard’s foray into the ETF space.
He reasoned, as I have, that investors trade too frequently when given the flexibility to do so. This is a problem because investors tend to trade so much (and so poorly) that they simply transfer ETFs’ cost advantage to their brokerage firms (in the form of trading costs) and, if they make much money, to gov’t coffers (i.e. frequent trading inhibits tax deferral potential).
Until Vanguard releases more details, this is all speculation. But I have no doubt that in time, Vanguard will have a full offering for institutions (they already do), advisors (pending) and the do-it-yourself investors that hold it in such high regard. I just hope they don’t pile onto Canada’s ETF parade.