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Vanguard bringing low fee funds to Canada

With Vanguard Group announcing it's coming to Canada, the push for low fund fees continues.

The push for lower management fees continues. Pennsylvania-based Vanguard Group, one of the world’s largest fund companies, is coming to Canada and bringing its low cost index and exchange-traded funds with it.

In a press release, William McNabb, the company’s chairman and CEO said that while Canada has a developed asset management market, Canadians are in the market for low-cost options.

John Gabriel, a Chicago-based ETF strategist with Morningstar, thinks McNabb is right. For years Canadians have been complacent with high fee funds, he says, but as markets pullback and people don’t get the 10% returns they did years ago, low-cost investments are starting to look more attractive.

“Vanguard sees an opportunity to come in and not only provide low-cost solutions to advisors and investors, but also to educate the public on why they should consider low-cost investments,” says Gabriel.

Most of Vanguard’s products are significantly cheaper than what competitors offer. While it’s still up in the air as to what funds the company will bring to Canada – it has to submit a preliminary prospectus to the Canadian Securities Regulators before it can reveal its slate of funds – it’s highly likely that their Canadian fees will be in line with their American ones. 

Vanguard’s MSCI Emerging Markets ETF (NYSE: VWO), for example, has an expense ratio of 0.22%. Canadians can buy this exact fund through Claymore Investments (TSX: CWO), but will pay a 0.65% fee.

Here’s another example: iShare’s Emerging Markets Index Fund (NYSE: EEM) is based on the same MSCI index as VWO, but the management fee is 0.69%.

It can afford the lower fees, says Gabriel, because it’s not a for-profit company. The company is owned by the investors who hold Vanguard funds – if you buy a fund you become a part owner – so it’s basically selling these products at cost.

“Vanguard is no frills,” says Gabriel. “They’re always piling money back into the business and sharing the rest with shareholders. “

Gabriel thinks its cheap offerings will have a significant impact on the mutual fund market. Not only will it get people thinking about lower cost options, but it will force other Canadian fund companies to make a choice: reduce fees or somehow offer better products and returns.

“It’s going to put pressure on the industry in terms of fees and cost,” says Gabriel. “They’ll have to compete on costs or try to differentiate themselves someway else.”

While Vanguard is only now setting up shop in Canada, many Canadians already own its products. According to the company between $1 billion and $2 billion of ETF assets trace back to Canadian investors. But these investors must buy U.S.-based funds, so they have to worry about currency exposure. Canadian funds now mean Canadian investors can buy Vanguard’s products with loonies instead of Greenbacks.

While some mutual fund companies may be nervous, Gabriel says investors should be thrilled. “When fund companies compete, investors win,” he says. “This is definitely a good thing.”